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To answer the questions in this problem, you need to read the article, "British Petroleum Company Ltd. (1987 Stock Offering)." The article contains...
To answer the questions in this problem, you need to read the article, "British Petroleum
Company Ltd. (1987 Stock Offering)." The article contains all the data needed for solving this problem.
(a) The repurchase plan of the Bank of England can be viewed as a put option on BP shares held by
underwriters. Although this is an american option, let us treat it as a European option here so that
you can value the option by Black-Scholes formula. If you want to value the option on October
30, 1987, what are the time to maturity and strike price of the put option?
(b) According to many analysts at the time, the volatility of BP share price was 85% shortly after the
1987 crash of the market. If you use Black-Scholes formula, how much was the repurchase plan
worth to each of the four U.S. underwriters at the end of day on October 30, 1987?
(c) Based on the stock prices and beta given in the article, what is the excess daily return on the
portfolio of the three publicly-traded underwriters from October 29 to October 30, 1987? (Use
the CAPM to calculate the excess return and assume that one-day risk-free interest rate is zero.)
(d) If you use the 85% volatility and Black-Scholes formula, what proportion in the excess daily