Some years ago the Australian firm Bond Corporation sold a share in some land that it owned

Question:

Some years ago the Australian firm Bond Corporation sold a share in some land that it owned near Rome for $110 million and as a result boosted its annual earnings by

$74 million. A television program subsequently revealed that the buyer was given a put option to sell its share in the land back to Bond for $110 million and that Bond had paid

$20 million for a call option to repurchase the share in the land for the same price.

a. What happens if the land is worth more than $110 million when the options expire?

What if it is worth less than $110 million?

b. Use position diagrams to show the net effect of the land sale and the option transactions.

c. Assume a one-year maturity on the options. Can you deduce the interest rate?

d. The television program argued that it was misleading to record a profit on the sale of land. What do you think?

AppendixLO1

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question
Question Posted: