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Assume you work for an oil company that deals with oil
contracts and you are
Assume you work for an oil company that deals with oil contracts and you are responsible for
constructing those oil contracts. Assume you have an oil contract that has the following
characteristics: Zero initial cost and the buyer pays S F each quarter with a cap of $21.90 F and
a oor of $19.90 F. If oil volatility is 15%, calculate F.
Assume this scenario: A single 5-year zero-coupon debt issue with a maturity value of $120 and the
expected return on assets of 12%. Calculate the following:
a. the expected return on equity
b. the volatility of equity
Assume this scenario: A single 5-year zero-coupon debt issue with a maturity value of $120 and the
expected return on assets of 12%. Calculate the following:
a. the expected return on debt
b. the volatility of debt
Assume your rm has 20 shares of equity, a 10-year zero-coupon debt with a maturity value of $200
and warrants for 8 shares with a strike price of $25. Calculate the value of the debt, the share price,
and the price of the warrant.
Patriot Corp. compensates executives with 10-year European call options which is granted at-themoney. If there is a signicant drop in the share price, the companys board will reset the strike price
of the options to equal the new share price. Then, the maturity of the repriced option will equal the
remaining maturity of the original option. Suppose = 30%, r = 6%, = 0, and the original share
price is $100. Calculate the following:
a. the value at grant of an option that will not be repriced
b. the value at grant of an option that is repriced when the share price reaches $60
c. the repricing trigger that maximizes the initial value of the option