1. Immunizing liabilities against interest rate changes

Suppose a pension plan is expecting a liability of GHS 2,938,000 in 5 years.

1. Show that if they buy an 8% annual coupon GHS 2,000,000 5-year bond at face value and interest rates remain unchanged, they will be able to meet the liability!
2. Why will investment in this bond not immunize the pension plan against its impending liability? Calculation is required.
3. Advise the pension plan with respect to a feature of the investment that they should make that will immunize them against the changing interest rates.

c) Black-Scholes-Merton option pricing and Executive Stock Options

State and explain the reasons why stock options are being used increasingly in designing executive compensations instead of increase in base pay. For example, the Ghana Stock Exchange, not too long ago, reported that ETI had listed an additional 33,572,650 ordinary shares as a result of the Chief Executive Officer exercising his share option rights. HFC Bank too did. So have others.

1. Alhaji Kofi is the Chief Executive Officer of the Ghana Pacific Trading Company (GPTC). His annual straight salary is GHC 10 million. The current value of GPTC stock is GHC 50 per share. Mr. Kofi has just been granted options on 1.5 million in shares of GPTC stock at-the-money by GPTCs Board of Directors. The risk-free rate is 20% p.a. The options are not exercisable for five years. The volatility of GPTC stock has been about 25 percent on an annual basis. Determine the value of Mr. Kofis stock options.

2. What figure would the press have reported (in all probability)?