# Question: Using the information in Table 15 5 assume that the volatility

Using the information in Table 15.5, assume that the volatility of oil is 15%.

a. Show that a bond that pays one barrel of oil in 1 year sells today for $19.2454.

b. Consider a bond that in 1 year has the payoff S1 + max(0, K1 − S1) − max(0, S1− K2). Find the strike prices K1 and K2 such that K2 − K1= $2, and the price of the bond is $19.2454. How would you describe this payoff?

c. Now consider a claim that in 1 year pays S1− $20.50 + max(0, K1− S1) − max(0, S1 − K2), where K1 and K2 are from the previous answer. What is the value of this claim? What have you constructed?

a. Show that a bond that pays one barrel of oil in 1 year sells today for $19.2454.

b. Consider a bond that in 1 year has the payoff S1 + max(0, K1 − S1) − max(0, S1− K2). Find the strike prices K1 and K2 such that K2 − K1= $2, and the price of the bond is $19.2454. How would you describe this payoff?

c. Now consider a claim that in 1 year pays S1− $20.50 + max(0, K1− S1) − max(0, S1 − K2), where K1 and K2 are from the previous answer. What is the value of this claim? What have you constructed?

**View Solution:**## Answer to relevant Questions

Swaps often contain caps or floors. In this problem, you are to construct an oil contract that has the following characteristics: The initial cost is zero. Then in each period, the buyer pays the market price of oil if it is ...A 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%, ...Explain how to synthetically create the equity-linked CD in Section 15.3 by using a forward contract on the S&P index and a put option instead of a call option. Using the assumptions of Example 16.4, and the stock price derived in Example 16.5 suppose you were to perform a "naive" valuation of the convertible as a risk free bond plus 50 call options on the stock. How does the price ...The strike price of a compensation option is generally set on the day the option is issued. On November 10, 2000, the CEO of Analog Devices, Jerald Fishman, received 600,000 options. The stock price was $44.50. Four days ...Post your question