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You are the head of risk management for a major airline. The forward price of oil for August is $56 per barrel, the premium for an August $56 put option is $3.85, and the premium for an August $56 call option is $2.95. Construct a “cap” to hedge the airline’s August oil purchases, using a risk-free rate of 2% for 6 months (February to August). Ignore commissions, margins, and other transaction costs.
a) Show the profit table for the cap over a range of oil prices from $44 to $68 in $2 increments, and then answer these questions:
b) What synthetic option position is created by the cap?
Receivables Investment Snider Industries sells on terms of 3/10, net 30. Total sales for the year are $1,936,000. Thirty percent of the customers pay on the 10th day and take discounts; the other 70% pay, on average, 28 days after their purchases. Wh..
Write a paragraph that discusses the impact of put-call parity on options trading. Discuss how this idea can be used to design specific strategies. Also discuss the limitations of put-call parity to American-style options.
The? 1-year interest rate is 7%. The? 1-year interest rate expected in 1 year is 5%. The? 1-year interest rate expected in 2 years is 7%. What are the? 2-year and? 3-year interest rates predicted by the pure expectations? theory?
A firm has a debt-to-equity ratio of 0.55. What is the total debt ratio?
Generate a list of estate planning objectives that apply to your personal family situation. Be sure to consider the size of your potential estate as well as people planning and asset planning. Estate planning is not just about taxes.
Burnwood Tech plans to issue some $60 par preferred stock with a 5% dividend. A similar stock is selling on the market for $74. Burnwood must pay flotation costs of 7% of the issue price. What is the cost of the preferred stock? Round your answer to ..
Dave and Ellen are newly married and living in their first house. The yearly premium on their homeowner’s insurance policy is $450 for the coverage they need. Their insurance company offers a 5 percent discount if they install dead-bolt locks on all ..
The price of a laser printer purchased by Paul's Printers and Office Supplies was $713. It cost $27 for delivery. The salvage value at the end of a 5-year life is $65. Prepare a depreciation schedule using the sum-of-the-year's method, and then enter..
As a firm increases risk of the projects, the debt holders charge higher interest rates. But this implies even a greater incentive to take on more risk, so in some instances creditors may ration credit altogether. If the firm has enough cash to finan..
What was Illinois Tool Works’ (ITW) fully diluted income per share on its Dec 2015 income statement?
Nick's Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $3 at the end of each year. The preferred sells for $55 a share. What is the stock's required rate of return (assume the market is in equilibrium with the required..
Mulroney Corp. is considering two mutually exclusive projects. Both require an initial investment of $10,000 at t = 0. Project X has an expected life of 2 years with after-tax cash inflows of $6,000 and $7,800 at the end of Years 1 and 2, respectivel..
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