9. FX Bank has succeeded in hiring ace foreign exchange trader, Lucinda Cable. Her remuneration package reportedly includes an annual bonus of 20 percent of the profits that she generates in excess of $100 million. Does Ms. Cable have an option? Does it provide her with the appropriate incentives?
15. Digital Organics has 10 million outstanding shares trading at $25 per share. It also has
a large amount of debt outstanding, all coming due in one year. The debt pays interest
at 8 percent. It has a par (face) value of $350 million, but is trading at a market value of
only $280 million. The one-year risk-free interest rate is 6 percent.
a. Write out the put–call parity formula for Digital Organics’ stock, debt, and
assets.
b. What is the value of the default put given up by Digital Organics’ creditors?
2. Find the HURDLE size of investment (the cost of the plant) such that in the Basic Example company will invest immediately with lower cost and will postpone the investment with higher cost.