1. Assume that the firm has assets worth A=$100, and that alpha=30%, r=8%, and the firm makes no payouts prior to the maturity date of the debt. There is a single debt issue with a maturity value of $120. Compute the yield on this debt assuming that it matures in 1 year, 2 years, 5 years, or 10 years. What debt-to-equity ratio do you observe in each case?
2. In the following problems assume S=$40, alpha=30%, r=8%, and delta=0. You own one 45-strike call with 180 days to expiration. Compute and graph the 1-day holding period profit if you delta- and gamma-hedge this position using a 40-strike call with 180 days to expiration.