Because doug wants to minimize as much downside in

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Because Doug wants to minimize as much downside in the shares as possible, we would solve for the put strike where the value of the put would be close to $1.00, or the value of the call. We use interactions to arrive at the put strike: Stock Price = $17.27 Put Strike = $14.00 Term = 1 year Interest Rate = 0.4% Dividend Yield = 0 Delta = .22 Volatility = 36.9% which is calculated 34.7% + [(.50 - .22)/25] * 4 * 5 Put Price = .99 Doug then takes out a margin loan for $21 million to generate sufficient cash immediately to help him meet his investment and liquidity objectives. Cash Flows: Loan $21.00 mil Less: Russell 2000 ETFs ($10.00 mil) Less: Energy Project ($10.00 mil) Less: Income Requirement ($1.00 mil) 5) What is Doug’s minimum pretax wealth level after a year if he follows your recommendations? Please quantify your answer. Answer: If Doug were to enter into these transactions, his minimum wealth would be: Energy Project = $5 million Russell 2000 = $5 million ($10 million x .5) 1-year collar = $67.2 million *
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Plus Income from collar = 0.05 million Minus Loan = $21.0 million Minus Interest = $0.24 million $56.01 million * Doug delivers 4.8 million shares at the $14 put strike
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Exhibit 1 QLGC Stock Profile Price 11/4 /10 $17.91 Shares Outstanding $108M Market Capitalization $1.94B 52-Week High $22.40 52-Week Low $14.30 3-Month Avg. Daily Volume 2.6M shares Dividend $0.00 Stock Loan (Shares available for borrowing) 25M shares available Exhibit 2 Interest Rate Information 1 Year LIBOR 0.9% Margin Loan and PVSF Financing Rate LIBOR + 25bps Rebate Rate LIBOR – 50bps Exhibit 3 QLGC Implied Volatility (%) (1) Expiration 25-Delta Puts 25-Delta Calls Apr-11 (5 months) 37.5 33.5 Jan-12 (14 months) 36.5 32.5 (1) Assume 50 delta options trade at implied volatilities equal to the average of the 25 Delta Puts and Calls Exhibit 4 Estimated Execution Shortfall for Shares Needed
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to Establish Initial Delta Size Estimated Shortfall 5 million shares 6% 4 million shares 5% 3 million shares 4% 2 million shares 3% 1 million shares 2%
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