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    Finance: Market Meldown

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    https://brainmass.com/business/black-scholes-model/finance-market-meldown-18093

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    1i)
    Step 1: Understanding the problem
    The terms would be conversion rights for each bond into 50 of the underlying shares (conversion ratio bond: share:: 1:50) after 5 years (time period), otherwise repayment at par (hence, at the end of 5 years the least you can get is $100).

    Step 2: Drawing the payout graph at the end of 5 years.
    Based on conversion of ratio bond: share:: 1:50, suppose the price of the share is $x, 5 years from now, then the amount of money you get is $50x.
    However, as stated in the last line of Step 1, least you can get is $100. Hence, the conversion will only take place if, 50x > 100. Thus, your downside is protected, but you have unlimited upside (as you make more money as the stock keeps on increasing in price).
    The diagram would look like this:

    As you can see from the above graph this is a typical payoff of a call option with a strike price of $100.

    The input till now is as follows ...

    Solution Summary

    The solution determines the options embedded in the convertibles in the given problem

    $2.49

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