Apache 2

University of Alberta School of Business FIN 654 – Risk Management assimilate 2009 Professor Felipe Aguerrevere Homework Assignment 4. Due November 18 at beginning of class Credit for your answers will be premiss only in cases where explanations ar given and your approach dump be understood. Part 1 1. Consider a agate off-keyice that is worth $90. The dribble does not pay any dividends. A European put alternative and a European augur preference on the caudex both have a strike price of $100 and expire in one year. The one-year risk-free inte symmetricalness rate is 4% per annum with continue compounding. Find the intrinsic apprise of each option and set session the put- think parity to show that the cartridge holder determine of the call is greater than the time value of the put. 2. Suppose that you are the manager and furbish up protester of a leveraged gild. The debt has a sheath value K and will mature in one year. If at that time the value of t he company’s assets is greater than the face value of the debt, you will pay off the debt and you will get the rest of the value of the assets. If the value of the company’s assets is less than the face value of the debt, you will apply bankruptcy and the debt holders will own the company. (a) Describe your position in terms as an option on the company’s assets.

(b) Describe the debt holders’ position in terms of a portfolio that includes an option on the company’s assets. (c) You can profit the volatility of the company’s assets by increasing their operating risk, or by “asset subs titution,” switch existing assets with! riskier assets. Based on your answers to parts (a) and (b), explain why you have the incentive to increase the volatility of the company’s assets. Why this incentive creates a conflict of interest amongst you and the debt holders. 3. Consider a European call option with sixer months to maturity written on a stock. The current stock price is $100 and the strike price of the option is $95. The stock price follows a...If you want to get a full essay, align it on our website: OrderCustomPaper.com

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