Fins3635 Final

929 WordsSep 17, 20134 Pages
FINS 3635 - Options, Futures, and Risk Management Techniques: Mock Final May 28, 2012 1) Consider a ﬁrm with two classes of zero-coupon debt: senior debt and junior debt. Suppose that the ﬁrm’s debt securities both mature at time T1 and the senior ranking debt has a face value of X1 and the junior ranking debt has a face value of X2 . The claims of the senior debt holders are paid ﬁrst, before the claims of the junior debt holders, who in turn are paid out their claims before the equity holders. The equity holders have limited liability. (a) Suppose that the total ﬁrm value at maturity is denoted as VT1 . Find the payoﬀ of the shareholders, the senior debt holders, and the junior debt holders at time T1 . (b) Hence ﬁnd the expressions…show more content…
The following formula deﬁnes the relationship between the level of electricity produced (P) as a function of Average Wind Speed (AWS) during the period. For 10 ≤ AW S ≤ 90, P = AW S × K and 0 otherwise. Assume K = 1. Revenue (R) is calculated as: R = P × Tariﬀ where Tariﬀ (T ) varies with the production level according to the following formula: T = 50 + 1000 P (a) Draw a graph of revenue as a function of the average wind speed. (b) You wish to hedge the periodic revenue of a wind farm that consists of 5 turbines by purchasing wind options. The wind options are available as vanilla calls and puts, as well as some exotics including binary type options 1 . Each wind option provides cover for a single period. Vanilla options provide payoﬀ equal to 5 times the diﬀerence between AWS and the strike price. Binary options are available with a payoﬀ of \$1, 000. You are able to take both long and short positions to optimise your exposure. State the type of option(s) and the quantity you would need to purchase to ensure revenue does not fall below \$10, 000 during the period. 1 In particular, this refers to what known as a cash-or-nothing options. A cash-or-nothing call option pays \$1 if the underlying is above the strike price and 0 otherwise. Similarly, A cash-ornothing put option pays \$1 if the underlying is below the strike price and 0 otherwise.