minicase 3 real options

Midterm II Options and Futures 4304 17 April 2018

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1. We have a contract for 10 year JPY government bond with CTD and its conversion factor 0.79. The face value of the contract is 100, 000, 000 JPY and the price of the CTD is 105.0

1. What is the face of the CTD the seller requires to deliver

2. What is the market value of CTD he will deliver?

2.

1. Use the no arb argument to explain the put call parity.

2. The current put strike with strike of 90 is 1.5$. Assuming the price of the stock is 100 risk free rate of 5% and option maturing in 3 months what will be the call price?

3.

1. Explain the difference between American and European options

2. Why the price of an American put is higher than the price of the European put?

4.

1. Explain why bonds can be represented through a portfolio of cash and a European put?

2. Assume u have a convertible bond in which u can convert 1000 in principal into 40 shares. The company decides to convert the bond now. Assuming u have an outstanding of 3000 in bond principal ( and the bond is traded at par.) what is going to be the new equity price assuming that u have 100 shares outstanding with a price of 40 per share?

5. The current stock price is 100 and in the good state of the world it will be 120 and in a bad state of the world is 80. The risk free rate is 5%.

1. If u issue a bond with a principal of 95 what will be its current price?

2. What will be the equity price

3. Value the put option through a replicating portfolio and verify the put call parity directly.