Chapter 14 14.3. Explain the principle of risk-neutral valuation. The price of an option or other derivative when expressed in terms of the price of the underlying stock is independent of risk preferences. Options therefore have the same value in a risk-neutral world as they do in the real world. We may therefore assume that the world is risk neutral for the purposes of valuing options. This simplifies the analysis. In a risk-neutral world all securities have an expected return equal to risk-free
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MFIN6003 Derivative Securities Dr. Huiyan Qiu End-of-chapter Questions for Practice (with Answers) Following is a list of selected end-of-chapter questions for practice from McDonald’s Derivatives Markets. For students who do not have a copy of the McDonald’s book‚ be aware that a copy of the book is reserved at the main library of the University of Hong Kong for you to borrow for short period of time. Answers provided are for your reference only. It is complied directly from the solution
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glossary‚ determine if the FASB considers options as securities or cash. Explain your position. The FASB considers options as securities. This is evident by the definition provided by the master glossary that states “unless otherwise stated‚ a call option that gives the holder the right to purchase shares of common stock from the reporting entity in accordance with an agreement upon payment of a specified amount. Options include‚ but are not limited to‚ options granted to employees and stock purchase
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of financial options‚ you have been asked to prepare a brief report that firm’s executives can use to gain a cursory understanding of the topic. To begin‚ you gathered some outside materials on the subject and used these materials to draft a list of pertinent questions that need to be answered. In fact‚ one possible approach to the report is to use a question-and-answer format. Now that the questions have been drafted‚ you have to develop the answers. a. What is a financial option? What is the
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E09-G11 Mridul Arora‚ Florent Bernard‚ Jacqueline Kwok‚ Pu Wang E09-G11 Sally Jameson Case 1. How much is the option compensation package worth With the 5-year T-Bill yield‚ we can calculate the rf rate‚ compounded continuously‚ input for the BlackScholes model. e5r = 1 + (5-year T-Bill yield) e5r = 1.0602 r = 0.0117 Exercise price X 35 Given by case text Current stock price Volatility of stock returns Time to maturity S ơ Ƭ 18.75 43% 5 r 6.02% 1.17% Given by case text Approximation given
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Options 4/3/2012 Option: you have the choice to buy something for a certain price but if the price is less than that price forget about the contract. The most you ever pay is the contract price. You have the possibility of doing better. Nothing to lose only gain since you locked in a certain price; seller of contract can only do worse. The person whom makes the contract charges a price to enter into the contract‚ the seller keeps this contract. This price is called the premium‚ options start
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The Society for Financial Studies The Information in Option Volume for Future Stock Prices Author(s): Jun Pan and Allen M. Poteshman Source: The Review of Financial Studies‚ Vol. 19‚ No. 3 (Autumn‚ 2006)‚ pp. 871-908 Published by: Oxford University Press. Sponsor: The Society for Financial Studies. Stable URL: http://www.jstor.org/stable/3844016 . Accessed: 09/04/2013 01:56 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use‚ available at . http://www
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harder to drive up profits. Stock option plans are different from stock award programs because stock option plans present employees with the option to purchase stock whereas stock award programs are grants of stock that are subject to certain conditions. Stock option plans have grown in popularity and are now an essential piece of any total compensation plan for senior management‚ executives‚ and key employees. Stock option plans give employees the option to purchase a specified number of shares
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Lynch’s choice of the conversion premium and coupon rate to propose to MoGen management. This pricing decision requires students understand the concept of valuing a convertible as the sum of a straight bond plus the conversion option. Valuing the conversion option as a call option requires the estimation of the Black-Scholes model‚ with the volatility being a particularly challenging input. On a strategic level‚ the case introduces students to the concept of matching a company’s business risk
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Answer for question A Based on the trends in following portfolio and P/L chart during the period of January‚ February and March‚ it is clearly to see there were some hedging effects during those three months transactions‚ but our hedging transactions were not enough in January and February and the situation was improved during the period of March. The unhedged line is the market intrinsic value and the red line shows our real operation reflects on the portfolio. At the end of January‚ if unhedged
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