4.  Piersol Paper Mill?s common stock currently sells for $145. Both
puts and calls on Piersol Paper are being traded. These options all
expire eight months from today, and they have a strike price of $160.
Eight months from today, Piersol Paper common stock will sell for $172
with a probability of 0.5. It will sell for $138 with a probability of
0.5. You own a put on Piersol Paper. Now, you are becoming nervous
about the risk to which you are exposed.
a. What other transactions should you make to eliminate this risk?
b. What is the expected payoff at expiration of the strategy you developed in (a)?

5.  The following facts apply to a convertible security:
Conversion price	$25/share
Coupon rate	6%
Par value	$1,000
Yield on nonconvertible debenture of same quality	10%
Market value of straight bond of same quality with coupon rate of 10%	$950
Stock price	$24/share
a. What is the minimum price at which the convertible should sell?
b. What accounts for any premium in the market price of the
convertible over the value of
the common stock into which it can be converted?

6.   The following table lists the closing prices for wheat futures
contracts. Suppose you bought
one contract at $5.00 at the opening of trade on March 15.
March 15 $5.03
March 16 $5.08
March 17 $5.12
March 18 $5.10
March 19 $4.98
a. Suppose that on March 18 you receive from your broker a notice of
delivery on that day.
i. What is the delivery price?
ii. What price did you pay for wheat?
iii. List the cash flows associated with this contract.
b. Suppose that on March 19 you receive from your broker a notice of
delivery on that day.
i. What is the delivery price?
ii. What price did you pay for wheat?
iii. List the cash flows associated with this contract.

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Request for Question Clarification by scriptor-ga on 08 Feb 2006 18:27 PST

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