Please write project412: your last name in the subject area. Part I. 1. (10 MARKS) Consider...

Transcribed Image Text:

Please write "project412: your last name" in the subject area. Part I. 1. (10 MARKS) Consider American call options written on S&P 500 etf (SPY). This etf pays dividends on June 18th. Therefore, we will use BSM formula to price call options maturing on June 16th. Go to finance.yahoo, copy and paste the table with current prices on these options maturing on June 16th to the excel spreadsheet. Consider 10 call options which differ by their strike prices: 5 options in-the-money and 5 options out-of-the-money. The difference between two adjacent strike prices should be $2. Make a table showing the stock (SPY) price, 10 strike prices and corresponding option prices, where option prices must be equal to the mean between the bid and the ask price. Find the expiration time, T, of the options 2. (10 MARKS) Find the historical standard deviation, o, of SPY returns based on the previous three months. (Use daily prices of SPY from finance.yahoo) 3. (30 MARKS) Assume that the continuously compounded risk-free rate is 0.1%. Use BSM formula to find the prices of the call options with the time to maturity, stock price, and strike prices from Q.1 and a from Q.2. Make a table with the following columns: Stock price, o, Strike Price, di, dz, N(di), N(d2), Price of Call option. The table should have 10 rows corresponding to 10 different strike prices used in Q.1 4. (30 MARKS) Find the implied volatilities for 10 strike prices from Q.1. Make a table showing the moneyness of the option (K/S), price of the option, and the implied volatility. Plot the implied volatility versus moneyness. How do you explain the shape of the curve? How it is related to the standard deviation, o, found in Q.2? At what strike price options are overpriced the most with respect to the BSM price? (Hint for finding implied volatility in Excel. Use table from Q.3. Have the option price in this table calculated based on the BSM formula with the inputs from the table. Now follow the steps: Go to Data->What If Analysis>Goal Seek. Then enter the cell # where the option price is calculated based on the BSM formula into "Set cell", enter the cell # with volatility into "By changing cell", enter the 7. Blackstone Group LP, a leading private equity firm, bought Equity Office Properties for $39 billion in its largest leveraged buyout that closed on Feb 9, 2007. To fund this buyout, Blackstone raised $31.9 billion in debt and a $3.5 billion of bridge loan. The remainder was funded by equity. Since closing the transaction on Feb 9, Blackstone has sold about $14.6 billion worth of assets of Equity Office. For reference, private equity is a term for equity investment in which the equity is not traded on a public stock market. Private equity is invested in various types of investments, for example, leveraged buyout, venture capital (focusing on new start-up companies), and mezzanine capital (focusing on structured debt). Private equity funds pools contributions from smaller investors to create a capital pool. As their name suggests, private equity funds make private equity investments and typically control management of the firms in which they invest. The goal is to create more value for the target firms. (20 points total) a. How does an acquisition like this create value for Blackstone? (7 points) b. What would be Blackstone's motivation for selling a significant portion of the target's (Equity Office Properties) assets immediately after the buyout? (7 points) c. Based on the leverage raised in this deal, this buyout is considered as an LBO. What would be a good valuation framework or model to use to value the target firm in this deal? (6 points) 8. Go to the Internet or other sources to gather information for a publicly listed company of your choice (i.e., a company listed on a public exchange such as NYSE, AMEX, or NASDAQ). From the information gathered, calculate, or find MVA, TRS, and EPS for 2020: (6 points each, 30 points total) a. MVA (Market Value Added) for the calendar year 2020. (Hints: Market value of equity is determined by the number of shares outstanding and price per share. If you have trouble finding the number of shares outstanding at year-end of 2020, you can use the most recently reported number of shares you can find. You should have no problem finding the price per share at year end of 2020. Market value of debt is determined by the market price of debt per contract and par value outstanding. For simplicity purposes, you can use the total book value of long-term debt plus short-term debt, reported in balance sheet at year-end 2020 to proxy for the market value of debt. Calculate invested capital for year-end 2019 using the balance sheet information.) b. TRS (total returns to shareholders) for calendar year 2020. c. EPS (earnings per share) for 2020. d. State if you agree or disagree with the statement: "Companies that focus on 'shareholder value' create healthier companies." Provide support for your answer. e. State if you agree or disagree with the statement: "The returns that investors earn are driven not by company performance, but by performance relative to expectations." Provide support for your answer. Please write "project412: your last name" in the subject area. Part I. 1. (10 MARKS) Consider American call options written on S&P 500 etf (SPY). This etf pays dividends on June 18th. Therefore, we will use BSM formula to price call options maturing on June 16th. Go to finance.yahoo, copy and paste the table with current prices on these options maturing on June 16th to the excel spreadsheet. Consider 10 call options which differ by their strike prices: 5 options in-the-money and 5 options out-of-the-money. The difference between two adjacent strike prices should be $2. Make a table showing the stock (SPY) price, 10 strike prices and corresponding option prices, where option prices must be equal to the mean between the bid and the ask price. Find the expiration time, T, of the options 2. (10 MARKS) Find the historical standard deviation, o, of SPY returns based on the previous three months. (Use daily prices of SPY from finance.yahoo) 3. (30 MARKS) Assume that the continuously compounded risk-free rate is 0.1%. Use BSM formula to find the prices of the call options with the time to maturity, stock price, and strike prices from Q.1 and a from Q.2. Make a table with the following columns: Stock price, o, Strike Price, di, dz, N(di), N(d2), Price of Call option. The table should have 10 rows corresponding to 10 different strike prices used in Q.1 4. (30 MARKS) Find the implied volatilities for 10 strike prices from Q.1. Make a table showing the moneyness of the option (K/S), price of the option, and the implied volatility. Plot the implied volatility versus moneyness. How do you explain the shape of the curve? How it is related to the standard deviation, o, found in Q.2? At what strike price options are overpriced the most with respect to the BSM price? (Hint for finding implied volatility in Excel. Use table from Q.3. Have the option price in this table calculated based on the BSM formula with the inputs from the table. Now follow the steps: Go to Data->What If Analysis>Goal Seek. Then enter the cell # where the option price is calculated based on the BSM formula into "Set cell", enter the cell # with volatility into "By changing cell", enter the 7. Blackstone Group LP, a leading private equity firm, bought Equity Office Properties for $39 billion in its largest leveraged buyout that closed on Feb 9, 2007. To fund this buyout, Blackstone raised $31.9 billion in debt and a $3.5 billion of bridge loan. The remainder was funded by equity. Since closing the transaction on Feb 9, Blackstone has sold about $14.6 billion worth of assets of Equity Office. For reference, private equity is a term for equity investment in which the equity is not traded on a public stock market. Private equity is invested in various types of investments, for example, leveraged buyout, venture capital (focusing on new start-up companies), and mezzanine capital (focusing on structured debt). Private equity funds pools contributions from smaller investors to create a capital pool. As their name suggests, private equity funds make private equity investments and typically control management of the firms in which they invest. The goal is to create more value for the target firms. (20 points total) a. How does an acquisition like this create value for Blackstone? (7 points) b. What would be Blackstone's motivation for selling a significant portion of the target's (Equity Office Properties) assets immediately after the buyout? (7 points) c. Based on the leverage raised in this deal, this buyout is considered as an LBO. What would be a good valuation framework or model to use to value the target firm in this deal? (6 points) 8. Go to the Internet or other sources to gather information for a publicly listed company of your choice (i.e., a company listed on a public exchange such as NYSE, AMEX, or NASDAQ). From the information gathered, calculate, or find MVA, TRS, and EPS for 2020: (6 points each, 30 points total) a. MVA (Market Value Added) for the calendar year 2020. (Hints: Market value of equity is determined by the number of shares outstanding and price per share. If you have trouble finding the number of shares outstanding at year-end of 2020, you can use the most recently reported number of shares you can find. You should have no problem finding the price per share at year end of 2020. Market value of debt is determined by the market price of debt per contract and par value outstanding. For simplicity purposes, you can use the total book value of long-term debt plus short-term debt, reported in balance sheet at year-end 2020 to proxy for the market value of debt. Calculate invested capital for year-end 2019 using the balance sheet information.) b. TRS (total returns to shareholders) for calendar year 2020. c. EPS (earnings per share) for 2020. d. State if you agree or disagree with the statement: "Companies that focus on 'shareholder value' create healthier companies." Provide support for your answer. e. State if you agree or disagree with the statement: "The returns that investors earn are driven not by company performance, but by performance relative to expectations." Provide support for your answer.