Calculate the one-year forward rates

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Reference no: EM133065257

Question 1: Shares in the Clan Corporation are currently selling for $25 each. In one year it is estimated that the price will increase or decrease by 20 per cent. Government bonds with one year to maturity are paying 8 per cent. What is the value of a call option with a $20 exercise price? A $26 exercise price?

Question 2: Company option values and the balance sheet
Collection Co Ltd has 50000 shares outstanding. The market value of Collection's assets is $800000. The market value of outstanding debt is $300000. Collection issued 100 company options some time ago that are about to expire. Each company option gives the owner the right to purchase 100 shares at a price of $7.50 per share.
What is the price of Collection's shares? What is the value of a company option?
Create a market value balance sheet for just before and just after the company options expire.

Question 3: Using the OPM
Calculate the Black-Scholes option prices in each of the cases below. The risk-free rate and the variance are quoted in annual terms. Notice that the vanance ie given, not the standard deviation. The last three may require some thought.

SHARE PRICE	EXERCISE PRICE	RISK-FREE RATE %	MATURITY	VARIANCE
$500.00	$600.00	8	6 months	0.20
2.50	1.50	6	9 months	0.30
5 00	6.00	8	6 months	0.40
0.00	10.00	9	12 months	0.65
9.00	3.00	7	forever	0.22
5.00	0.00	8	6 months	0.44

Question 4: Hedging the sale price
A cotton grower anticipates a 2000-tonne crop, due for harvest in January. A cotton futures contract is for 50 tonnes and the price of a February cotton futures contract is $250 per tonne. The grower decides to hedge all of the crop.

In January the grower harvests 2100 tonnes of cotton. In January the auction price for cotton is $310 per tonne and February futures contracts are trading for $305 per ton. Calculate the overall value of the harvested crop, including the profit or loss from futures trading.

Question 5: Suppose a share sells for $11. The risk-free rate is 8 per cent. The price of the share in 1 year will be $12 or $13.00. What is the value of a call option with a $12 exercise price?
What is wrong here? What would you do?

Question 6: Calculating company option values

A note with 20 detachable company options has just been offered for sale at $100. The note matures in 10 years and has an annual coupon of $8. Each company option gives the owner the right to purchase 4 shares at $1 per share. Ordinary notes (no company options) of similar quality are priced to yield 10 per cent. What is the value of a company option?

Question 7: Calculating forward rates

A firm issues seven different bonds today (31/12/13). Each has a face value of $100 and a 5% coupon rate paid annually. The bonds differ in maturity dates and issue prices, as shown below:

BOND	MATURITY	ISSUE PRICE S
1-year	2014	98.13
2-year	2015	95.54
3-year	2016	91.60
4-year	2017	86.69
5-year	2018	82.29
6-year	2019	76.43
7-year	2020	70.44

Calculate the one-year 'forward' rates for each of the 7 years.

Reference no: EM133065257

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