Value of a Right [LO4] Show that the value of a right just prior to expiration can be written as:
where PRO, PS, and PX stand for the rights-on price, the subscription price, and the ex-rights price, respectively, and N is the number of rights needed to buy one new share at the subscription price.
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Fundamentals of Corporate Finance
- !3! Question: Given the formula for the CD = f/e -1+ (iuk - ius) = 0, if e = 2, f = 2.5, iuk = 0.10 and ius= 0.08, the covered interest differential (CD) requires that O a. f1 ; et; iusl; iuk! O b. ft; el ; IUST ; IUKI O Cf1; et; iust i luk? O d f1; el ; iUS ; iUK! O e f1; et; lust : iuk!arrow_forward3arrow_forward* Sketch the pay-off diagram for the straddle option: A(S) = max(S- E, 0) + max(E – S, 0). -arrow_forward
- a) Let VK(t, T) be the value of a forward contract on an asset with delivery price K, VK(t, T) = (F(t, T) − K)e −r(T −t) . a) Verify that VK(T, T) equals the payout of a forward contract with delivery price K. For an asset that pays no income, substitute the expression for its forward price into the above equation and give an intuitive explanation for the resulting expression. b) Suppose at time t0 you go short a forward contract on an asset that pays no income with maturity T (and with delivery price equal to the forward price). At time t, t0 < t < T, suppose both the price of the asset and interest rates are unchanged. How much money have you made or lost? This is sometimes called the carry of the trade.arrow_forwardThe forward contract price, established when the contract is initiated at t = 0, is denoted as a.Vo(0,T) b.Fo(0,T) c.So(1 + r)^T d.Fo(0,T)/(1 + r)^(T – t)arrow_forwardSuppose that we can describe the world using two states and that two assets are available, asset K an asset L. We assume the asset’s future prices have the following distribution Suppose that we can describe the world using two states and that two assets are available, asset K an asset L. We assume the asset’s future prices have the following distribution state 1 Future Price Asset K $55 $45 2. Future Price Asset L $60 $30 The current price of asset K is $50, and the current price of asset L is $50. What are the values of the unit claims (C1 and C2)? What is the risk free rate implied by these assets? What is the “risk neutral probability” of state 1? What is the “risk neutral probability” of state 2? What is the price implied for an asset providing $100 in state 1 and $50 in state 2? You plan to buy a home for $100,000 in the future.You want to guarantee that you will have the money.What would you buy/sell today to accomplish this, and what…arrow_forward
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- Question 1 (Mandatory) Which of the following equations calculates a put option's value? Os.et. N(d2) - K N(da) OK.ert. N(d2) - S. N(d) Os.e*t. N(-d2) - K N(-dg) OK.et.N(-d2)- S N(-d1) Question 2 (Mandatory) The forward price is determined at contract initiation but changes during the life of the forward contract. O True Falsearrow_forwardWhat is the correct way to determine the value of a long forward position at expiration? The value is the price of the underlying ... ... multiplied by the forward price. ... divided by the forward price. ... plus the forward price. ... minus the forward price please need type answer not an imagearrow_forwarda,b c and d pleasearrow_forward
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