How can change in stock price affect the firm cash flow

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Reference no: EM132036677

On May 15th of a certain year XYZ Corp. had 100,000 shares of ABC stock. The ABC stock was traded at $15. XYZ planned to sell the stocks in a month. But they had concerns that the stock price might fall below $14 by then. The firm would like to use stock options to hedge the position. Related call options were traded at $2.50 and related put options were traded at $0.25. Answer the questions below. a. Explain XYZ Corp.’s risk exposure. How can the change in ABC stock price affect the firm’s cash flow? b. Should the company choose call options or put options? Should they take the long position or the short position? c. How can the stock options help to hedge the risk? d. Would you recommend the company to use forwards hedge? Explain. e. Suppose on May 15th XYZ Corp. purchased options to hedge the risk. On June 15th the spot price was $9. Calculate the cash flows on May 15th and June 15th.

Reference no: EM132036677

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