Consider again the Netscape PEPS discussed in this chapter and assume the following: the price of Netscape is $39.25, Netscape is not expected to pay dividends, the interest rate is 7%, and the 5-year volatility of Netscape is 40%. What is the theoretical value of the PEPS?
Answer to relevant QuestionsA DECS contract pays two shares if ST < 27.875, 1.667 shares if the price is above ST > 33.45, and $27.875 and $55.75 otherwise. The quarterly dividend is $0.87. Value this DECS assuming that S = $26.70, σ = 35%, r = 9%, ...Assume that the volatility of the S&P index is 30%. a. What is the price of a bond that after 2 years pays S0 + max(0, S2 − S0)? b. Suppose the bond pays S0 + [λ × max(0, S2 − S0)] in year 2. For what λ will the bond ...A firm has outstanding a bond with a 5-year maturity and maturity value of $50, convertible into 10 shares. There are also 20 shares outstanding. What is the price of the warrant? The share price? Suppose you were to compute ...Suppose that S = $100, σ = 30%, r = 6%, t = 1, and δ = 0. XYZ writes a European put option on one share with strike price K = $90. a. Construct a two-period binomial tree for the stock and price the put. Compute the ...Repeat the previous problem for debt instead of equity.
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