Reference no: EM132003530
1. To hedge its exposure to the price of oil, an airline buys a call option on oil with the exercise price Kc and sells a put option with the exercise price Kp (Kp<Kc). Both contracts have the same size chosen such as to hedge the entire exposure, and their premiums are equal. On a Diagram/Graph, show each of the following: Seperate diagrams for each:
a) The unhedged exposure as a function of the future spot price of oil
b) The gain from the call option as a function of the future spot price of oil
c) The gain from the put option as a function of the future spot price of oil
d) The hedged exposure as a function of the future spot price of oil
2. Which of the following statements is CORRECT?
A. The yield on a 3-year corporate bond should always exceed the yield on a 2-year corporate bond.
B. The yield on a 3-year Treasury bond cannot exceed the yield on a 10-year Treasury bond.
C. The yield on a 2-year corporate bond should always exceed the yield on a 2-year Treasury bond.
D. The yield on a 10-year AAA-rated corporate bond should always exceed the yield on a 5-year AAA-rated corporate bond.
E. None of the choices here is correct.