European options on Orange Conglomerate Co.

 

 

1. Do Chapter 21 Problem 34 in BKM P740

2. Do Chapter 21 Problem 36 in BKM P740

3. Do Chapter 21 Problem 37 in BKM P740

4. Do Chapter 21 Problem 38 in BKM P740

5. European options on Orange Conglomerate Co. with an exercise price of $100 and a maturity of one year, are selling for $10.95 if they are calls and $16.19 if they are puts. The one-year riskless interest rate is 5%.
a) What must be the price of Orange Conglomerate stock? [Hint: Your answer should be a number of dollars divisible by 10.]
b) Are the calls in the money or out of the money? By how much? Are the puts in the money or out of the money? By how much?
c) Now suppose that Orange Conglomerate stock follows a binomial model. A year from now the stock will either be up by $k or down by $k (assume that k > 0). Draw an event tree with two states of the world. In your event tree include the two possible values of the stock in terms of k and the two possible payoffs of the call option in terms of k.
d) What is k? [Hint: your answer should be another number divisible by 10.]

6. [Modified BKM Question] Firm ABC enters a 5-year swap with firm XYZ to pay LIBOR in return for a fixed 8% rate on notional principal of $10 million. Two years from now, the market rate on 3-year swaps is LIBOR in return for a fixed 6% rate. At this time, firm XYZ goes bankrupt and defaults on its swap obligation.
a) Why is firm ABC harmed by the default?
b) Assume that the yield curve is flat (all bonds have the same yield to maturity). What is the market value of the loss incurred by ABC as a result of the default?
c) Suppose instead that ABC had gone bankrupt. How do you think the swap would be treated in the reorganization of the firm?

 

Sample Solutions

Item arrangement is the manner by which brands are put into non-promoting media like PC amusements, books, famous tunes and stage plays for e.g. supported activitys for the advancement of Cadbury’s chocolate put in the UK TV cleanser ‘Crowning liturgy Street’ after the opening titles and after and before the business breaks; this is influencing the youngsters and attracting them to purchase the Cadbury chocolate since little kids can’t separate this is an include. It is a developing wonder in market, which has gotten generally little consideration from business ethicists. In advertising at the large scale level, there are issues of maintainability and misuse of assets through overconsumption by encouraging covetousness and realism. Promoting works at the center point of riches creation; it pulls in a ton of the general analysis coordinated at free enterprise concerning the disintegration of regular assets and the devastation of nature. At smaller scale level, it pulls in a ton of reactions for explicit instances of double dealing or conning, for example, deluding/wrong sustenance marks or differential value publicizing. There is across the board analysis of showcasing works on advancing items that are unsafe to wellbeing, similar to high-fat and high-salt sustenances, cigarettes and liquor. UK has made Ofcom(Office of Communication) to make the laws with respect to item situation in a way depicted above.The code incorporates an area on ‘Business references and different issues’. Inside this segment, three standards are indicated (under Section 10): (1) supporters must keep up full publication command over customized content, (2)editorial and publicizing must be plainly isolated, and (3) item position is restricted (http://www.ofcom.org.uk/television/ifi/codes/bcode/business/). Item arrangement and regular promoting morals Moral assessment of promoting rehearses has commonly utilized three noteworthy strands of good reasoning, utilitarianism, deontology and excellence morals (Robin and Reidenbach 1987). We are examining 2 of them. An utilitarian assessment of showcasing is for the most part to concentrate on its convenience to society, the way that at a miniaturized scale level, it helps common trades among makers and purchasers, while at a full scale level, it empowers the general public to appreciate the advantages of the division of work. The moral worries of purchasers in regards to item position fit into this classification – item arrangement of firearms and cigarettes, for instance, might be viewed as deceptive by a few customers. An utilitarian assessment may well arrive at the resolution that item arrangement is in fact, a moral practice. This is under the thinking that the expanded deals are the indications of consumer loyalty as can be sensibly accepted in any event for instances of express item situation. Then again, there is the hazard that expanded item situation may, undermine the nature of intervened amusement and data,, hence decreasing social, utility notwithstanding when it increments financial utility. Goodness morals may give the best study of item situation since it centers around the aims and the character of the individual starting the activity as opposed to the moral status of the demonstration itself. By assessing the virtual morals in item position ome focuses which can be attracted are promoting, lawfulness must be the principle basis for passing judgment on the moral status of the motive.A showcasing effort improved the situation the buyers who are very much educated and who realize this is a kind of ad contrasts in moral terms from publicizing to kids who can’t recognize TV programs, amusements, melodies and publicizing. On the off chance that numerous customers know about the method of item position, it will have less impact morally. Numerous youthful shoppers undoubtedly think about the nature and degree of item arrangement as it happens in films, TV appears and other amusement items. Yet, the degree to which even an insightful gathering of people knows about an item situation correspondence while they are simply appreciating the sensational stimulation is extremely hard to build up. Numerous shoppers will say that they are not affected by promoting, but rather this case appears to be not any more tenable than the case of thinking about item position as a showcasing procedure, it doesn’t invulnerable one to trickiness. Consequently, there is a requirement for a moral investigation that bargains with item arrangement, which again can apply an utilitarian, a deontological and an uprightness morals point of view; aside from this it likewise needs to consider circumstance explicit components that emerge from the idea of the item, the level of buyer information, the ramifications of, showcase division techniques, the expectation, of the advertiser and, the natural genuineness of, the strategy for influence utilized.

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