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You suspect that Delta airlines will merge with Northwest airlines in the coming month. Delta stock is trading at $0: 85. There is a 60% chance that the merger will occur, in which case, the stock will be worth $1: 2.
There is a 40% chance that the merger will not occur, in which case, the stock will continue its downward plunge to $0: 3. If r = 0: 02, what is the value of a call with strike price K = $1 and maturity one month, i.e. T = 1= 12?
If you were to sell one thousand of these calls, explain precisely how much of the money you would keep in cash and how much you would invest in the stock to be perfectly hedged in one month.
What are the potential ramifications of the Norwegian Fund's sale of Wal-Mart stock? How should Ray Bracey respond to Norwegian Fund's sale of Wal-Mart stock.
Casey just purchased a $1,000 face value bond at an invoice price of $1,288.16. The bond has a coupon rate of 6.2 percent, semiannual interest payments, and the next interest payment occurs one month from today. Of the amount paid for the bond, what ..
Ratoon Company has a bond outstanding with 10 years to maturity, an 8.50 percent coupon, semi annual payments, and a $1,000 par value. The bond has a 5.50 percent yield to maturity, but it can be called in 5 years at a price of $1,140. What is the bo..
The loan is amortized over 25 years. How much principal have you paid over the first 10 years?
Portfolio risk and return: suppose that the S&P500, with a beta of 1 has an expected return of 10%, and T-bills provide a risk free return of 4%. How would you construct a portfolio from these two assets with an expected return of 8%. How would you c..
Compact fluorescent lamps (CFLs) have become more popular in recent years, but do they make financial sense? Suppose a typical 60-watt incandescent light bulb costs $0.54 and lasts for 1,000 hours. If you require a 10 percent return, at what cost per..
Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $3,300 and sell its old washer for $900. The new washer will last for 6 years and save $700 a year in expenses. If the firm uses straight..
what are the reward-to-risk ratios of Y and Z?
Pension funds pay lifetime annuities to recipients. What will be the par value of your holdings in the 20-year coupon bond?
What is the likely effect of the euro’s exchange rate movement on the volume of Sluban’s exports to the eurozone?
A Treasury coupon bond that pays interest semi-annually has a par value of $1,000, a maturity of 2 years, and a coupon rate of 5.2%. Use the following spot rates to compute the arbitrage-free value of this coupon bond.
Lisa Sweet, the CEO of Digital Storage Devices has been granted options on 300,000 shares. The stock is currently trading at $27 a share and the options are at the money. The volatility of the stock has been about .15 on an annual basis over the last..
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