Question: You have been asked to construct an oil contract that
You have been asked to construct an oil contract that has the following characteristics: The initial cost is zero. Then in each period, the buyer pays S − F, with a cap of $21.90 − F and a floor of $19.90 − F. Assume oil volatility is 15%. What is F?
Answer to relevant QuestionsUsing Figure 3.16 on page 85 as the basis for a discussion, explain under what circumstances an investor might prefer a PEPS to the stock or vice versa. Value the M&I stock purchase contract assuming that the 3-year interest rate is 3% and the M&I volatility is 15%. How does your answer change if volatility is 35%? Compute the required semiannual cash dividend if the expiration payoff to the CD is $1300− max(0, 1300 − S5.5) and the initial price is to be $1300. As discussed in the text, compensation options are prematurely exercised or canceled for a variety of reasons. Suppose that compensation options both vest and expire in 3 years and that the probability is 10% that the ...Suppose that a firm offers a 3-year compensation option that vests immediately. An employee who resigns has two years to decide whether to exercise the option. Compute annual compensation option expense using the stock price ...
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