Question

4 (10 Points) In 1986 Standard Oil (a company) issued a specific bond where the holder received no interest. At the bond's maturity the company promised to pay back the principal of $1000 plus an additional amount based on the price of oil at that time. The additional amount was equal to 170 times the excess (if any) of the price of a barrel of oil at maturity over $25. However, the maximum additional amount paid was restricted to S2550 (which corresponds to a price of $40 per barrel). (a) Write and plot the payoff function of the bond. Make sure to label your axes and mark all critical points. [5 points] (b) Explain how Standard Oil can benefit from issuing this bond. [3 points] (c) Express the bond payoff as the sum of payoffs of a zero-coupon bond and two options. 12 points]

Answer 1

be 2s to be Poudt ク 170 CP-25) 2.S 22TO So p22s と350t し10 2S 1000 3sso

ett- ニ -$ loo@ 17to ?) 170c: 3250 /ラ C._c 19-11 the adel ticed andu Shoud be etind ラ170(p-la): 3sso P-19:20 9 P 311 to anomound a price b). The Cownpostcan teneft foun tre bord oiQ Poices do not ise uch 0