Call option on oil with the exercise price

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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.

Reference no: EM132003530

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