Exam 12: Financial Engineering and Security Design

We wish to cap participation in a 3-year equity-linked option at 50.0% return. Our profit alpha is 3.0%. The S&P 500 price = 950, div = 0.015, σ = 0.22, and interest rates are 4.8%. What is the implied participation rate?

Assume the spot price of pork bellies is 75 cents per pound, the 1-year forward price is 77 cents, and the annual interest rate is 4.5%. What is the price of a zero-coupon note paying 1 pound of pork bellies in one year?

A risky bond promises to pay $3,000 at the end of two years. The bond has a risk neutral probability of default of 10%. If in default, the bondʹs residual payout will be $2,500. If the risk free rate is 5%, what is the yield to maturity on this bond?

Dawn, Inc. stock is $37.00 per share. The companyʹs semi-annual dividend is forecasted as $0.25 per share, increasing every 6 months by 20.0%. What is the price of a zero-coupon equity-linked bond, promising to pay one share in 4 years, given annual interest rates of 6.0%?