5. How much is the contingent payment worth in early December 2000?

Use a
Black-Scholes calculator/spreadsheet (see options valuation.xls). Be prepared to
outline your assumptions and findings

The contingent payment is actually a structure product that consists of longing 141
million call options with strike price of $38, shorting 141 million call options with strike
price of $42.55 and longing a one-year risk-free bond with face value of 0.45 million.
According to the Black-Scholes model, the call value of C
38
= $6.51 and the call value of
C
42.55
= $4.14. Premium difference is $2.37 = $6.51 $4.14.

At the maturity date, if the stock price is below $38, GM will still receive 0.45 million.
Thus, the value of contingent payment equals the value of the structure product.

Value (Contingent PMT) = $2.37*141mm+PV (0.45mm, 1year) = 334.60 million

Assumptions related to the calculation
1. Risk free rate is 5.74% that is the yield of 20 year T-Bond.
2. Assumptions under Black-Scholes Model

Black-Scholes (Call option with $38 strike price)

Call value $6.51
Call delta (hedge ratio) 0.730

Using put-call parity
Put value $1.90
Delta -0.270

S underlying asset price $40.49
X exercise price $38.00
rf risk-free rate 5.74%
sd volatility 24.80%
t years to expiration 1.00

Cumulative Standard Normal Function
d1 from Black-Scholes 0.611
N(d1) 0.730

d2 from Black Scholes 0.363
N(d2) 0.642

Black-Scholes (Call option with $42.55 strike price)

Call value $4.14
Call delta (hedge ratio) 0.562

Using put-call parity
Put value $3.83
Delta -0.438

S underlying asset price $40.49
X exercise price $42.55
rf risk-free rate 5.74%
sd volatility 24.80%
t years to expiration 1.00

Cumulative Standard Normal Function
d1 from Black-Scholes 0.155
N(d1) 0.562

d2 from Black Scholes (0.093)
N(d2) 0.463