EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 6, Problem 3PROB
Summary Introduction
The convertible bonds have a face value of $1,000 which can be converted into 50 common shares. Current price of the stock is $19, and bond is $980.
Convertible bonds or debenture is a type of bond which has the option of converting the bonds to common shares. Each share price or the conversion price is determined by the face
When, the market price of the stock is more than the conversion price, then the bondholders can sell the stock and gain from the difference in price.
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Susan is looking into a convertible bond but does not know how to value this bond. The bond has a $1,000 face value and a conversion ratio of 36.
What is the conversion price?
If the stock price is $42, what is the conversion value?
What is the downside risk percentage of the bond if the current price is $1,250 and the investment premium is $861.53? Is this risk concerning?
The stock is currently selling for $42 per share. The issuer of the bond has announced a call; the call price is 108. What are your options here? What should you do?
Suppose you are a seller . At time t = 0 you get £C from the buyer where C is the risk-neutral price of the option. You then have to design a hedging strategy which would allow you to meet your financial obligation in one year’s time. Your portfolio should consist of two investments: you are allowed to buy the underlying shares and to deposit money in the bank.
The price of the share evolves according to a geometric Brownian motion. State the formulae you will need to compute the number of shares in the portfolio and the capital deposited in the bank at any time t, 0 ≤ t ≤ 1.
Suppose XYZ stock pays no dividends and has a current price of $50. The forward price for delivery in 1 year is $55. Suppose the 1-year eective annual interest rate is 10%.
(a) Graph the payo and prot diagrams for a forward contract on XYZ stock with a forward price of $55.
(b) Is there any advantage to investing in the stock or the forward contract? Why?
(c) Suppose XYZ paid a dividend of $2 per year and everything else stayed the same.
Now is there any advantage to investing in the stock or the forward contract?
Why?
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- Refer to the stock options on Microsoft in the Figure 2.10. Suppose you buy a November expiration call option on 100 shares with the excise price of $140. Required: a-1. If the stock price at option expiration is $144, will you exercise your call?a-2. What is the net profit/loss on your position? (Input the amount as a positive value.)a-3. What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) b-1. Would you exercise the call if you had bought the November call with the exercise price $135?b-2. What is the net profit/loss on your position? (Input the amount as a positive value.)b-3. What is the rate of return on your position? (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.)c-1. What if you had bought the November put with exercise price $140 instead? Would you exercise the put at a stock price of $140?c-2. What is the rate of return on your position? (Negative…arrow_forwardLet's say I decide to sell 1 call option through an account, but this account will only let me do this if you I already own the stock (a “covered call”), so I buy 500 shares of Company A and then proceed to sell a call option on Company Say this short call option expires in-the-money. What does in-the-money mean in this context? What will I have to do as the seller of this call option if the option expires in-the-money? And what about if it expires out-of-the-money?arrow_forwardIn many markets, all the proceeds from a short sale are deposited as collateral with the lender (i.e., the initial margin is essentially 100%). If the collateral value is then reduced to 50% of the value of the stocks that the short seller owes to the lender, the lender would require the short seller to restore the collateral value to 100%. You are a short seller in such a market. Initially, you shorted 2,000 shares of the stock at $5.55 per share. At what stock price will the lender ask you to restore the collateral value to 100%? $8.33 b. $11.10 c. $7.40 d. Not enough information to answer that questionarrow_forward
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