1. What is the current yield offered by the stock, the bond, and the calls and puts?

2. What is the value of the bond in terms of the stock?

3. What is the intrinsic value of each option?

4. What are the time premiums paid for each option?

5. What will be the price of each security if after six months the fundamental economic picture is not changed and the price of the stock remains at $15?

6. While Wagner considers a further decline in F&F’s situation to be unlikely, the possibility does exist that after six months the stock would fall to $10. What impact would that have on the prices of the various securities?

7. Wagner believes that the price of the stock will rise to $25 a share within six months. What impact would such a price increase have on the prices of the various securities?

As an outside financial advisor to Cosima Wagner, what course of action would you suggest with regard to Fasolt and Fafner’s securities? In formulating your answer, consider the pros and cons of each of the alternatives and which conditions favor each security.

Cosima Wagner is an optimist who likes to speculate. She enjoys watching prices change rapidly and believes that she could make large profits by judiciously taking advantage of price swings. Thus it is easy to see why she is attracted to options whose prices may change rapidly from day to day. She especially likes the securities associated with Fasolt and Fafner (F&F) Construction Corporation, a large building and engineering firm that also has considerable holdings of coal and oil reserves.