Options Pt 4

Question 1

Convertible Bonds

Answer 1

non-convertible bond + warrant, because if stock price goes up enough the owner will profit by converting bond ownership to shares of common stock

Question 2

Convertible Preferred

Answer 2

can convert preferred to common

non-convertible preferred + warrant, as the price of the common stock goes up, they will profit from converting compared to common

Question 3

Portfolio Insurance

Answer 3

Use put options to protect against low stock prices or make an artificial put with Treasury bills and diverse stock

Question 4

Option on Firms Assets

Answer 4

Owning stock in a firm with bonds outstanding is a call option on the firm’s assets, because if firm asset value is under bond repayment, bond holders take everything

Question 5

Portfolio of options > options on a portfolio

Answer 5

portfolio of options has a higher value