FIN-516 – WEEK 3 HOMEWORK ANSWER KEY
OPTION PROBLEM NO. 1
Exercise Value: Current Stock Price – Strike Price
Exercise Value: $36 - $30 = $6
Time Value = Option Price – Exercise Value
Time Value = $9 - $ 6 = $3

OPTION PROBLEM NO. 2
Time Value = Market Price of the Option – Exercise Value
$7 = V - $23
V = $30 Market Price
Exercise Value = Po – Strike Price
$23 = Po - $21
Po = $43 Price of the Underlying Stock

PROBLEM 15 - 4 S = (1 – wd) (Vop) = (1 – 0.4)($500) = $300 million is the Value of Equity

PROBLEM 15 - 6 n = n0 – (D/P) = 60 – ($150/$7.5) = 60 – 20 = 40 million shares

Problem on Swaps based on Chapter 23 A pays LIBOR + 1% to its lenders, receives LIBOR from B, and pays B 7.95%, for a net fixed payment of 8.95%. B pays 9.4% to its lenders, pays LIBOR to A, and receives 7.95% from A, for a net payment of LIBOR + 1.45%.

PROBLEM BASED ON CHAPTER 23 – FUTURES CONTRACT What is the implied interest rate yield on a Treasury Bond ($100,000) futures contract that settled at 100’24 (or 100 24/32)? If interest rates increased by 0.75%, what would be the contract’s new value? Assume that this is based on 20 Years, with an annual yield of 8%, with semi-annual Payments.

Using a financial calculator we solve for rd:
N = 40; PV = -1,007.50; PMT = $40; FV = 1,000
Solve for I or rd = 3.9623; Annualizing rd = 3.9623 X 2 = 7.925%
If interest rate (annual) increase by 0.75%, then we solve for PV:
N = 40; I = (7.925 +0.75) / 2 = 4.3375; PMT = $40; FV = 1,000
PV = 936.4272 X 100 = $93,642.72
The contract’s value decreased from $100,750 to