Premium $1.25 Call a. Draw the payoff diagram for a long position in the call option. b. Draw the payoff diagram for a short position in the call option. c. Draw the payoff diagram for a long position in the put option. d. Draw the payoff diagram for a short position In the put option. 2.In expected loss is the actuarially fair insurance premium. Suppose your company wants to insure a building worth $245 million. relevant discount rate is 4 percent. fair insurance premium is the premium that results in a zero NPV for both the insured and the insurer. As such, the present value of the The probability of loss is 1.25 percent in one year, and the you can make modifications to the building that will reduce the probablity of a loss to 90 percent. How much would you be willig to pay for these modifications? s to pay for capital improvements at their manufacturing plants. ABC Company is a well-established frm with an excellent credit a LIBOR 1 percent floating rate. XYZ Company is a fledgling start-up irm without a strong credit 3. ABc Company and X12 Company need to raise funds improvements at their history. It can borrow funds either at a 10 percent fixed rate or at LUBOR+3 percent floating rate Is there an opportunity here for ABC and XYZ to benefit by means of an interest rate swap? b. Suppose you've just been hired at a bank that acts as a dealer in the swaps market, and your boss has shown you the borrowing rate information for your clients ABC and Xvz -hie ne ng r ur bankLO me Describe how you could bring these two companies together in an interest rate swap that would make b thems be er that folow The stock is currently selling for $85. 4. Use the option quote information shown here to answer the quest 160 230 170 2.80 6.00 8.50 140 Jul 20 Last 600160 8.50 10.20 170 139 1.40 3.90 3.65 a. Are the call options in the money? What is the intrinsic value of an RWI Corp.call option? b. Are the put options in the money? What is the intrinsic value of an RWI Corp. put option? Two of the options are clearly mispriced. Which ones? At a minimum, what should the mispriced options sell for? Explain how you could profit from the mispricing in each case Yield on of same quality a. What is the minimum price at which the convertible should sell? What is the price of a call option with the same exercise price? 1 8 2 3