A default free convertible bond can be converted to 1.4 shares of stock at the o

Question

A default free convertible bond can be converted to 1.4 shares of stock at the option of the bondholder. Each convertible bond carries a face value of 100 and an annual coupon rate 6%. The conversion to stock may take place today or at the end of year one. Suppose the current price of a single share of stock is S = $60, and at the end of the year one its price must be either Su= $80 or Sd = $40. The annual risk free borrowing and lending rate is 20%. Specify and investment strategy to create a tracking portfolio for the convertible bond.

Explanation / Answer

convert it now is most profitable one, dont go with future and it is uncertain.

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