1.Fernando Baltra Company wished to issue zero coupon straight debt with approximately a 15-year maturity.

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1.Fernando Baltra Company wished to issue zero coupon straight debt with approximately a 15-year maturity. The company is rated single A by both Moody’s and S&P. How would you estimate the approximate yield if the October 1999 yield curve in Fig.1 and the spreads in Fig.2 prevailed? What is the approximate yield the company would pay?

  1. 2) Consider a 1-year risky zero coupon bond issued by company A. Suppose that the proba- bility of default (risk neutral) of A in 1-year is 0.5% and the recovery rate of the bond is 40%. Given riskless 1-year interest rate being 3% (continuously compounding), calculate the 1-year credit spread for company A.
  2. 3) Consider a 3-month European put option with a strike price of $100 on an underlying asset which has a current price of $90 and annualized volatility of 20%. The market interest rate is assumed to have a flat term structure so that the interest rate is a fixed quantity of 8%.

    (a) Determine the option value by Black Scholes formula.

    (b) What is the meaning of delta-normal approach to VAR for measuring risks of deriva- tives positions?

    (c) What is the 99% daily delta-normal VaR in return of issuing this option? (Hint:z0.01=2.33)

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