Reference no: EM132576465

The Wall Street Journal reported a few years ago that Dell Computer Corp. was having to pay $47 a share to repurchase shares of its stock that were trading in the market at around $24. It seems that over the years, Dell had sold put options on its own stock and told investors it would use the option premiums it received to offset the cost of issuing shares in its employee stock ownership plan. As long as its share price was rising, the puts expired worthless and Dell seemed to come out ahead. But Dell's share price had recently fallen, bringing millions of options into the money. In fact, Dell had written put options on 96 million shares at an average share price of $44, giving rise to a potential liability of $4.22 billion. Do you think Dell is hedging, or is it speculating, when it sells put options on its own stock to "offset" employee stock ownership plan expense?

a. Dell was hedging because put options reduce risk

b. Dell was speculating because it increased its risk by selling the put options

c. Dell was speculating because it took a short position in an option (took on an obligation)

d. Dell hedging because it was paid for the put options

e. A and B

f. A and C

g. A and D

h. B and C

i. B and D

j. C and D

k. all but A

l. all but B

m. all but C

n. all but D

o. all are true