You work for Goldman Sachs who is the lead underwriter of Firm T's IPO. You need to set up the contract and Firm T has agreed to any of the two following contracts: Contract A: $20 mill and a green provision of 15% (which matures in 1 day) Contract B: $21mill Contract C: $19mill +1% of the IPO price You have estimated the price of Firm T to be 70mill and this is the IPO price. The daily volatility on the IPO day is around 40%. The risk-free rate is 0%. Use Black-Scholes to choose one contract. Answer choices: A) Contract B B) Contract C C) You are indifferent D) Contract A
You work for Goldman Sachs who is the lead underwriter of Firm T's IPO. You need to set up the contract and Firm T has agreed to any of the two following contracts: Contract A: $20 mill and a green provision of 15% (which matures in 1 day) Contract B: $21mill Contract C: $19mill +1% of the IPO price You have estimated the price of Firm T to be 70mill and this is the IPO price. The daily volatility on the IPO day is around 40%. The risk-free rate is 0%. Use Black-Scholes to choose one contract. Answer choices: A) Contract B B) Contract C C) You are indifferent D) Contract A
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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You work for Goldman Sachs who is the lead underwriter of Firm T's IPO. You need to set up the contract and Firm T has agreed to any of the two following contracts:
Contract A: $20 mill and a green provision of 15% (which matures in 1 day)
Contract B: $21mill
Contract C: $19mill +1% of the IPO price
You have estimated the price of Firm T to be 70mill and this is the IPO price. The daily volatility on the IPO day is around 40%. The risk-free rate is 0%. Use Black-Scholes to choose one contract.
Answer choices:
A) Contract B
B) Contract C
C) You are indifferent
D) Contract A
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