ASSIGNMENT: CITIC TOWER II: The Real Option
Executive Summary:
Structure of Nikkei-Linked Euro-Yen Transactions:
Role of Kingdom of Denmark:
Risks exposure for Goldman Sachs: 1. Risk of bearing the unsold inventory of NPWs:
If the investors find prices too high then much of the inventory would remain unsold and GS will have to bear the costs of unsold warrants.

Risk Mitigation:
GS would offset its risk through futures position in the Nikkei offered by the Singapore, Osaka & Tokyo stock exchanges

2. Exchange Rate Risks:
Considering preference of U.S investors, GS would bear the exchange rate risks for its investors. This implies that GS has to sell NPWs in terms of dollars whereas the same has been purchased by it in terms of yen. Also, in the 1980s, the Nikkei and the yen/dollar exchange rate were moving in opposite direction which further increased its exposure to exchange rate risk.

Risk Mitigation:
This can be mitigated through Quantos, a product offered by its currency and commodity division. A complete hedge would cost GS about $1 per warrant whereas hedging 80% of its risk would cost it $0.50 per warrant only

3. Repute at risk:
GS would not like to keep the prices very low. At the same time it cannot price them very high as there is a risk that competitors might copy the product and start selling it at lower prices. Also, if NPWs started trading at lower prices in the secondary market this would bring disrepute for the organization and its partners involved.
Problem Statement: * What should be the right pricing strategy for Nikkei Put Warrants (NPWs)

Solution:
Assumptions:
* Constant Volatility * Securities are traded continuously * Zero transactions costs * The risk free rate is constant and it is possible to borrow and lend infinitely at this rate
Data input for calculation for calculations