**Question 1003** Black-Scholes-Merton option pricing, log-normal distribution, return distribution, hedge fund, risk, financial distress

A hedge fund issued zero coupon bonds with a combined $**1** billion **face** value due to be paid in **3** years. The promised yield to maturity is currently **6**% pa given as a continuously compounded return (or log gross discrete return, ##LGDR=\ln[P_T/P_0] \div T##).

The hedge fund owns stock assets worth $**1.1** billion now which are expected to have a **10**% pa arithmetic average log gross discrete return ##(\text{AALGDR} = \sum\limits_{t=1}^T{\left( \ln[P_t/P_{t-1}] \right)} \div T)## and **30**pp pa standard deviation (SDLGDR) in the future.

Analyse the hedge fund using the Merton model of corporate equity as an option on the firm's assets.

The risk free government bond yield to maturity is currently **5**% pa given as a continuously compounded return or LGDR.

Which of the below statements is **NOT** correct? All figures are rounded to the sixth decimal place.