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1. You own a put option on Ford stock with a strike price of $ 8$8. The option will expire in exactly six months' time. a. If the stock is trading at $5 in six months, what will be the payoff of the put? b. If the stock is trading at $22 in six months, what will be the payoff of the put? c. Draw a payoff diagram showing the value of the put at expiration as a function of the stock price at expiration. a. If the stock is trading at $5 in six months, what will be the payoff of the put? If the stock is trading at $5 in six months, the payoff of the put is $( ? ) (Round to the nearest dollar.) 2. Dynamic Energy Systems stock is currently trading for $27 per share. The stock pays no dividends. A one-year European put option on Dynamic with a strike price of $36 is currently trading for $9.16. If the risk-free interest rate is 10% per year, what is the price of a one-year European call option on Dynamic with a strike price of $36? The price of the call is $ (?). (Round to two decimal places.) 3. Consider an American put option on XAL stock with a strike price of $61 and one year to expiration. Assume XAL pays no dividends, XAL is currently trading for $10 per share, and the one-year interest rate is 8%. If it is optimal to exercise this option early: a. What is the price of a one-year American put option on XAL stock with a strike price of $67 per share? b. What is the maximum price of a one-year American call option on XAL stock with a strike price of $61 per share? a. What is the price of a one-year American put option on XAL stock with a strike price of $ 67$67 per share? The price of the one-year American put option is $(?) (Round to the nearest dollar.) 4. Use the option data from the table (table below) to determine the rate Google would have paid if it had issued $125.86 billion in zero-coupon debt due in January 2011. Suppose Google currently had 314.65 million shares outstanding, implying a market value of $132.18 billion. Risk-free rate is 1.20% (Assume perfect capital markets.) The yield on the Google debt is (?) %. (Round to one decimal place.) GOOG 420.09420.09 +7.87 Jul 13 2009 @ 13:10EST Vol 2177516 Calls Bid Ask Open Int 11 Jan 150.0 (OZF AJ) 273.60 276.90 100 11 Jan 160.0 (OZF AL) 264.50 267.520 82 11 Jan 200.0 (OZF AA) 228.90 231.20 172 11 Jan 250.00 (OZF AU) 186.50 188.80 103 11 Jan 280.0 (OZF AX) 162.80 165.00 98 11 Jan 300.0 (OZF AT) 148.20 150.10 408 11 Jan 320.0 (OZF AD) 133.90 135.90 63 11 Jan 340.0 (OZF AI) 120.50 122.60 99 11 Jan 350.0 (OZF AK) 114.10 116.10 269 11 Jan 360.0 (OZF AM) 107.90 110.00 66 11 Jan 380.0 (OZF AZ) 95.80 98.00 88 11 Jan 400.0 (OZF AU) 85.10 87.00 2577 11 Jan 420.0 (OZF AG) 74.60 76.90 66 11 Jan 450.0 (OZF AV) 61.80 63.30 379 Given the CBOE call option quotes for Google stock, we can calculate the implied debt yield given perfect markets if Google were to borrow by issuing 18-month, zero coupon bonds. 5. Your utility company will need to buy 125,000 barrels of oil in 10 days time, and it is worried about fuel costs. Suppose you go long 125 oil futures contracts, each for 1,000 barrels of oil, at the current futures price of $60.00 per barrel. Suppose futures prices change each day as follows: a. What is the mark-to-market profit or loss (in dollars) that you will have on each date? b. What is your total profit or loss after 10 days? Have you been protected against a rise in oil prices? c. What is the largest cumulative loss you will experience over the 10-day period? In what case might this be a problem? a. What is the mark-to-market profit or loss (in dollars) that you will have on each date? Calculate the mark-to-market profit or loss below: (Round price change to the nearest cent and profit or loss to the nearest dollar.) Day 1 Price Price Change Profit/Loss $59.50 $ (?) $ (?) 6. Your start-up company has negotiated a contract to provide a database installation for a manufacturing company in Poland. That firm has agreed to pay you $110,000 in three months time when the installation will occur. However, it insists on paying in Polish zloty (PLN). You don't want to lose the deal (the company is your first client!), but are worried about the exchange rate risk. In particular, you are worried the zloty could depreciate relative to the dollar. You contact Fortis Bank in Poland to see if you can lock in an exchange rate for the zloty in advance. You find the following table posted on the bank's Web site, showing zloty per dollar, per euro, and per British pound: 1 week 2 weeks 1 month 2 months 3 months USD purchase sale 3.1419 3.1795 3.1474 3.1778 3.1375 3.1744 3.1358 3.1739 3.1357 3.1708 3.7836 3.8254 3.7871 3.8298 3.7906 3.8342 EUR purchase sale 3.7804 3.8214 3.7814 3.8226 GBP purchase 5.5131 5.5131 5.5112 5.5078 5.5048 sale 5.5750 5.5750 5.5735 5.5705 5.5681 a. What exchange rate could you lock in for the zloty in three months? How many zloty should you demand in the contract to receive $110,000? b. Given the bank forward rates in part (a), were short-term interest rates higher or lower in Poland than in the United States at the time? How did Polish rates compare to euro or pound rates? Explain. a. What exchange rate could you lock in for the zloty in three months? You could lock in an exchange rate of zloty per U.S. dollar in three months time through a forward contract with the bank.(Round to four decimal places.) 7. You have been hired as a risk manager for Acorn Savings and Loan. Currently, Acorn's balance sheet is as follows (in millions of dollars): Assets Cash reserves 51.9 Auto loans 91.9 Mortgages 152.3 Total Assets 296.1 Liabilities Checking and savings 78.9 Certificates of deposit 102.6 Long-term financing 96.3 Total liabilities 277.8 Owner's equity 18.3 Total liabilities and equity 296.1 When you analyze the duration of loans, you find that the duration of the auto loans is 2.2 years, while the mortgages have a duration of 7.1 years. Both the cash reserves and the checking and savings accounts have a zero duration. The CDs have a duration of 2.2 years, and the long-term financing has a 10.9-year duration. a. What is the duration of Acorn's equity? b. Suppose Acorn experiences a rash of mortgage prepayments, reducing the size of the mortgage portfolio from $152.3 million to $101.5 million, and increasing cash reserves to $102.7 million. What is the duration of Acorn's equity now? If interest rates are currently 4% and were to fall to 3%, estimate the approximate change in the value of Acorn's equity. (Assume interest rates are APRs based on monthly compounding.) c. Suppose that after the prepayments in part (b), but before a change in interest rates, Acorn considers managing its risk by selling mortgages and/or buying 10-year Treasury STRIPS (zero coupon bonds). How many should the firm buy or sell to eliminate its current interest rate risk? a. What is the duration of Acorn's equity? The duration of the assets is years. (Round to two decimal places.)