Non-standard bond to raise capital

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Reference no: EM131073426

Standard Oil issued a non-standard bond to raise capital in the following way. At the bond’s maturity the company promised to pay $1,000 plus an additional amount based on the price of oil at that time. The additional amount was equal to the product of 170 and the excess (if any) price of a barrel of oil at maturity over $25. The maximal additional amount paid was $2,550 (which corresponds to a price of $40 per barrel). Show graphically that this nonstandard bond can be replicated (or is equivalent to) a combination of a standard zero coupon bond with face value of $1,000 plus two positions in options. What are the two option positions required to replicate this bond?

Reference no: EM131073426

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