T14 Options in Corporate Finance and Real Options.docx -...

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BBMF2073 FOREX AND DERIVATIVES Tutorial 14: Options in Corporate Finance and Real Options Question 1: A sole proprietor has RM500,000 of equity in his firm. Suppose he borrows RM4 million at 10% interest per year, show at end of year 1, i) the payoff to the proprietor ii) the payoff to the debt holder Question 2: Learning that you have just completed a course in Risk Management, a friend comes to you for advice. He is faced with two investment choices. Option 1: Place a RM10,000 investment with an index fund for one year. (An index fund is a mutual fund that invests in a portfolio that tracks the index. Option 2: Place the RM10,000 with an index linked bank deposit that a local bank is offering. Under this scheme, a depositor gets back his entire capital and zero interest if the FBMKLCI

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