Using the information in Table 15.5, suppose we have a bond that after 2 years pays one barrel of oil plus λ × max(0, S2 − 20.90), where S2 is the year-2 spot price of oil. If the bond is to sell for $20.90 and oil volatility is 15%, what is λ?
Answer to relevant QuestionsUsing 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, ...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 ...Assume that the volatility of the S&P index is 30% and consider a bond with the payoff S2 + λ × [max(0, S2 − S0) − max(0, S2 − K)]. a. If λ = 1 and K = $1500, what is the price of the bond? b. Suppose K = $1500. For ...Suppose a firm has 20 shares of equity and a 10-year zero-coupon convertible bond with a maturity value of $200, convertible into 8 shares. What is the value of the debt, the share price, and the price of the warrant? Firm A has a stock price of $40, and has made an offer for firm B where A promises to pay 1.5 shares for each share of B, as long as A's stock price remains between $35 and $45. If the price of A is below $35, A will pay ...
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