A call option on a bond with a duration of 6.88 years and a YTM of...
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A call option on a bond with a duration of 6.88 years and a YTM of 5% has a strike price of $94. The price of the bond today is 93.47. The option costs the buyer 50 cents. a. Using MD, what is the interest rate that makes the call option just worth exercising? b. If the volatility of bond prices doubled would the option cost more or less than 50 cents? c. If interest rates fell to 3.5% on the maturity date of the option what would the approximate net profit be? A call option on a bond with a duration of 6.88 years and a YTM of 5% has a strike price of $94. The price of the bond today is 93.47. The option costs the buyer 50 cents. a. Using MD, what is the interest rate that makes the call option just worth exercising? b. If the volatility of bond prices doubled would the option cost more or less than 50 cents? c. If interest rates fell to 3.5% on the maturity date of the option what would the approximate net profit be?
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Answer rating: 100% (QA)
SOLUTION a To calculate the interest rate that makes the call option just worth exercising we can use the modified duration MD of the bond and the option delta The option delta represents the change i... View the full answer
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-1260153590
12th edition
Authors: Stephen M. Ross, Randolph W Westerfield, Robert R. Dockson, Bradford D Jordan
Posted Date:
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