Question
C5. Suppose you live in a state that has a usury law prohibiting interest charges above 9%. Current market interest rates are 18% for a
C5. Suppose you live in a state that has a usury law prohibiting interest charges above 9%. Current market interest rates are 18% for a project. You are a wealthy individual who wants to offer a one-year construction loan of $100,000 to Storage Partners to build a miniwarehouse.
a. If you lend the money at 9%, what will be your loan payoff in one year?
b. You want to receive a fair market return of 18%. Design a portfolio of contracts that will promise you a $118,000 payoff in one year.
a.at expiration, asset value plus put value equals call value plus strike price
b.if you "buy" (from Storage Partners, for $100,000) the warehouse (that will be built) along with a 1-year put on it that has a strike price of $118,000 you'll have a minimum of $118,000 in value at the end of the year
c.if you write a 1-year call option to Storage partners with a strike price of $118,000, they will exercise their option if the warehouse is worth more than $118,000 at the end of the year
d.if the warehouse is worth less than $118,000 at the end of the year, you will exercise your put option
e.A and B
f.A and C
g.A and D
h.B and C
i.B and D
j.C and D
k.all but A
l.all but B
m.all but C
n.all but D
o.all are true
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