Problems


  1. Use the monthly stock returns in the file Volatility.xlsx to determine estimates of annual volatility for Intel, Microsoft, and GE.

  2. A stock is selling today for $42. The stock has an annual volatility of 40 percent and the annual risk-free rate is 10 percent.

    • What is a fair price for a six-month European call option with an exercise price of $40?

    • How much does the current stock price have to increase in order for the purchaser of the call option to break even in six months?

    • What is a fair price for a six-month European put option with an exercise price of $40?

    • How much does the current stock price have to decrease in order for the purchaser of the put option to break even in six months?

    • What level of volatility would make the $40 call option sell for $6? (Hint: Use the Goal Seek command.)

  1. On September 25, 2000, JDS Uniphase stock sold for $106.81 per share. On the same day, a $100 European put expiring on January 20, 2001, sold for $11.875. Compute an implied volatility for JDS Uniphase stock based on this information. Use a T-Bill rate of 5 percent.

  2. On August 9, 2002, Microsoft stock was selling for $48.58 per share. A $35 European call option expiring on January 17, 2003, was selling for $13.85. Use this information to estimate the implied volatility for Microsoft stock. Use a T-Bill rate of 4 percent.

  3. You have an option to buy a new plane in three years for $25 million. Your current estimate of the value of the plane is $21 million. The annual volatility for change in the plane’s value is 25 percent, and the risk-free rate is 5 percent. What is the option to buy the plane worth?

  4. The current price of copper is 95 cents per pound. The annual volatility for copper prices is 20 percent, and the risk-free rate is 5 percent. In one year, we have the option (if we desire) to spend $1.25 million to mine 8 million pounds of copper. The copper can be sold at whatever the copper price is in one year. It costs 85 cents to extract a pound of copper from the ground. What is the value of this situation to us?

  5. We own the rights to a biotech drug. Our best estimate is that the current value of these rights is $50 million. Assuming that the annual volatility of biotech companies is 90 percent and the risk-free rate is 5 percent, what is the value of an option to sell the rights to the drug five years from now for $40 million?

  6. Merck is debating whether to invest in a pioneer biotech project. They estimate that the worth of the project is –$56 million. Investing in the pioneer project gives Merck the option to own, if they want, a much bigger technology that will be available in four years. If Merck does not participate in the pioneer project, they cannot own the bigger project. The bigger project will require $1.5 billion in cash four years from now. Currently, Merck estimates the net present value (NPV) of the cash flows from the bigger project to be $597 million. Assuming a risk-free rate of 10 percent and that the annual volatility for the bigger project is 35 percent, what should Merck do? (This is the problem that started the whole field of real options!)

  7. Develop a worksheet that uses the following inputs to compute annual profit:

    • Annual fixed cost

    • Unit cost

    • Unit price

    • Annual demand=10,000–100*(price)

    Then protect the cells used to compute annual demand and annual profit.




Microsoft Press - Microsoft Office Excel 2007. Data Analysis and Business Modeling
MicrosoftВ® Office ExcelВ® 2007: Data Analysis and Business Modeling (Bpg -- Other)
ISBN: 0735623961
EAN: 2147483647
Year: 2007
Pages: 200

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