Macdonalds Problem

In: Miscellaneous

Submitted By nambishan
Words 2955
Pages 12
(A.) Introduction
This paper provides an overview of how the various component of the Black Scholes model impact the option price and to what degree. The 6 determinants of the BS model namely stock price, strike price, time to expired, volatility, risk free interest rate and dividend are explained as well as their relative impacts of Call and Put prices.
This is followed by discussions of a case study on a company UWA which has decided to change its performance rewards policy from bonus payout to an options offer and whether the management would actually benefit from such a program.
Finally another case study covering the financial relationship between Macdonalds Corporation and its subsidiary in UK and the various arrangements between the firms. The paper analyses the benefit of hedge policies using cross currency swaps and whether Macdonalds should recognize its profit and loss for Cross currency swaps as OCI (Other Comprehensive Income) in its Revennue statements and the potential impacts.
This submission is part of the Main Assignment for the Advanced Treasury Management – Financial Engineering module as part of MSC 25 course.

(1a.) is the cumulative distribution function of the standard normal distributionS is the spot price of the underlying assetT − t is the time to maturityK is the strike pricer is the risk free rateN(d1) and N(d2) represent log normal distribution values. |
Options are derivative instruments that give investors the right to buy or sell the underlying asset sometime in the future for a certain price. Ideally the price of an option should have been the difference between the Future price and the Current price. However it became evident that other factors such as the duration, the volatility of the underlying, Interest rates also influence the price of an option. As such a mathematical model called the Black-Sholes model was…...

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