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Outperformance certificates (also called ‘‘sprint certificates,'' ‘‘accelerator certificates,'' or ‘‘speeders'') are offered to investors by many European banks as a way of investing in a company's stock. The initial investment equals the stock price, S0. If the stock price goes up between time 0 and time T, the investor gains k times the increase at time T, where k is a constant greater than 1.0. However, the stock price used to calculate the gain at time T is capped at some maximum level M. If the stock price goes down, the investor's loss is equal to the decrease. The investor does not receive dividends.
(a) Show that an outperformance certificate is a package.
(b) Calculate using DerivaGem the value of a one-year outperformance certificate when the stock price is 50 euros, k = 1:5, M = 70 euros, the risk-free rate is 5%, and the stock price volatility is 25%. Dividends equal to 0.5 euros are expected in 2 months, 5 months, 8 months, and 11 months.
Compute the IRR on the following cash flow streams: An initial investment of $22,986 followed by a single cash flow of $34,690 in year 6. An initial investment of $2,175,412 followed by cash flows of $1,774,000 and $1,140,700 in years 2 and 4, respec..
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Determine the dollar amount to be received by the counterparty on this interest rate swap each year based on the assumed forecasts of LIBOR.
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Discuss the reasons why a firm may repurchase its own common stock. Explain the differences between par value, book value, and market value per share of common stock.
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Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $127,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $582,000 p..
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