b) Mike Burry, PhD, is head of the research department of Scion LP. One of the companies he is researching, Sub & Primes, is a UK-based wholesale mortgage dealer. Mike values Sub & Primes assets at 300m and estimates the standard deviation in this asset value at 25%. Sub & Primes has debt outstanding in the form of a 5-year zero coupon bond with current face value of 200m. The 5-year Treasury note rate is 1.2%.

b.1 Using the Black, Scholes and Merton model for option valuation:

i. Precise the value of each model parameter (underlying asset, strike price, time to maturity, variance in the value of the underlying asset and risk free rate).

ii. Find the value of d1, d2, N(d1) and N(d2). iii. Calculate the value of Sub & Primes equity.

b.2 What should the interest rate on Sub & Primes debt be?