Financial Management

Instructions
1. Please read the problems carefully and make sure you provide answers to all parts of problem
sets. Circle around or highlight your final answers. Detail must be provided (50% of points will
be deducted, if you just provide correct answers without any detail or reasoning).
2. This is an open-note quiz. Please do not communicate with any other students. ANDERSON’S
ACADEMIC HONESTY CODE is applied, please visit http://www.mgt.unm.edu/honesty for the
detail.
3. This quiz mainly covers Notes 9-12.
Page 2_HC Chen_UNM
Numerical Problem Sets (100% in total for all problem sets; the credit allocation is specified next to each
problem set (e.g., 10% for problem set 1) as highlighted below. Detail must be provided.)
1. (10%; 2% for each subquestion) The following information is given for the stock of Akamai
Technologies (AKAM). S=39.25, annual volatility=45%, effective annual interest rate =2.0% (i.e.,
exp(rc)=1.02), T=2 years, and no cash dividend is expected by option expiration (for analytical
simplification). In a “zero-cost collar” contract often used by executives trying to lock in gains or hedge
insider holding, Don sells European call options, if called upon, to sell shares at $A (higher). And he can
use the proceeds to buy European put options, giving him the right to sell shares at $B (lower). This
arrangement covers Don’s 100,000 AKAM shares and is exercisable 2 years from now.
(a) If Don sets the value of B at 25, calculate the value of put option (p in part (b)) for each share hedged.
(b) Calculate f X SN d Xe N d p
rT
  

( ) ( ) ( )
1 2
using the initial selected exercise price X of 40.84.
(c) Calculate ( ) ( )
2
‘
f X e N d
rT
  using the initial selected exercise price X of 40.84.
(d) Based on
( )
( )
1 ‘
n
n
n n
f x
f x
x   x  , what is our new guess for the implied exercise price?
(e) Find the exercise price of A for the call option contained in the zero-cost collar contract.