Assignment:
In 1988 the Australian firm Bond Corporation sold a share in some land that it owned near Rome for $110 million and as a result boosted its 1988 earnings by $74 million. In 1989 a television program revealed that the buyer was given a put option to sell its share in the land back to Bond for $110 million and that Bond had paid $20 million for a call option to repurchase the share in the land for the same price.18
(a) What happens if the land is worth more than $110 million when the options expire? What if it is worth less than $110 million?
(b) Use position diagrams to show the net effect of the land sale and the option transactions.
(c) Assume a one-year maturity on the options. Can you deduce the interest rate?
(d) The television program argued that it was misleading to record a profit on the sale of land. What do you think?