Structured Notes and Corporate Applications (70 Points)
Respond to the following questions.
1.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 floor of $19.90 − F. If oil volatility is 15%, calculate F.
2.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
3.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
4.Assume your firm 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.
5.Patriot Corp. compensates executives with 10-year European call options which is granted at-the-money. If there is a significant drop in the share price, the company’s 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 σ = 30%, r = 6%, δ = 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
Complete your 2-4 page response using Microsoft Word or Excel. For calculations, you must show work to receive credit. Your well-written response should be formatted according to CSU-Global Guide to Writing and APA Requirements, with any sources properly cited. Upload your completed work to the Module 5 folder.
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