fin 516 homework week 2 Essay

2011 WordsAug 7, 20149 Pages
Problem 20-6 on Call Options based on Chapter 20 (Excel file included) You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly 3 months’ time. a. If the stock is trading at $55 in 3 months, what will be the payoff of the call? • Payoff-max=(50-s) = max (55-40)=15 the Ford owner will gain $15 b. If the stock is trading at $35 in 3 months, what will be the payoff of the call? • Payoff-max=(35-s) = max (35-40)=-5 the owners will gain $-5 c. Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration. Payoff Stock Price 15 55 -5 Problem 20-8 on Put Options based on Chapter 20 (Excel file included) You own a put…show more content…
It can now borrow at a spread of 0.50% over treasuries, which now yield 9.10% for a 7-year maturity. Also, 7-year interest rate swaps are quoted at LIBOR versus 9.50%. How would you lock in your new credit quality for the next 7 years? What is your effective borrowing rate now? • Refinance $100m short-term loan with long-term loan at 9.10% + 0.50%=9.60%. Unwind swap by entering new swap to pay LIBOR and receive 9.50%. Effective borrowing cost now: • 9.60% + (-LIBOR + 8.0%) + (LIBOR – 9.50%) = 8.10% • The rate is equal to the original long-term rate, less the 2% decline in the firm’s credit spread. Problem 30-6 on Futures Contract based on Chapter 30 (Excel file included) Your utility company will need to buy 100,000 barrels of oil in 10 days, and it is worried about fuel costs. Suppose you go long 100 oil futures contracts, each for 1,000 barrels of oil, at the current futures price of $60 per barrel. Suppose futures prices change each day as follows. a. What is the mark-to-market profit or loss (in dollars) that you will have on each date? Position: Long 100 contracts Contract: 1,000.00 barrels Current price: 100,000.00 a. c. Day Price Gain/Loss on mark to market Cumulative Gain/Loss 0 60.00 1 59.50 (0.50) (50,000.00) 2 57.50 (2.00) (200,000.00) 3 57.75 0.25 25,000.00 4 58.00 0.25 25,000.00 5 59.50

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