Derivatives

1. Assume you work for an oil company that deals with oil contracts and you are responsible for constructing those oil contracts. Assume you have an oil contract that has the following characteristics: Zero initial cost and the buyer pays S - F each quarter with a cap of $21.90 - F and a ?oor of $19.90 - F. If oil volatility is 15%, calculate F.

2. Assume this scenario: A single 5-year zero-coupon debt issue with a maturity value of $120 and the expected return on assets of 12%. Calculatethe following:

a. the expected return on equity
b. the volatility of equity

3. Assume this scenario: A single 5-year zero-coupon debt issue with a maturity value of $120 and the expected return on assets of 12%. Calculatethe following:

a. the expected return on debt
b. the volatility of debt

4. Assume your ?rm has 20 shares of equity, a 10-year zero-coupon debt with a maturity value of $200 and warrants for 8 shares with a strike price of $25. Calculate the value of the debt, the share price, and the price of the warrant.

5. Patriot Corp. compensates executives with 10-year European call options which is granted at-the-money. If there is a signi?cant drop in the share price, the company's board will reset the strike price of the options to equal the new share price. Then, the maturity of the repriced option will equal the remaining maturity of the original option. Suppose σ = 30%, r = 6%, δ = 0, and the original share price is $100.

Calculatethe following:

a. the value at grant of an option that will not be repriced
b. the value at grant of an option that is repriced when the share price reaches $60
c. the repricing trigger that maximizes the initial value of the option

Complete your 2-4 page response using Microsoft Word or Excel. For calculations, you must show work to receive credit.