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Unformatted text preview: o Hedging: Take on financial contract that is negatively correlated w/ your underlying position If prices shoot up thats bad, but you gain on your call option This is like buying insurance Futures contract: o I will buy 10,000 barrels of oil from you in 1 year, lets fix the price right now o Traded on exchange o Ex. Ramsync: =SDRAM (NPV=-$33M) + MRAM growth opportunity MRAM must be worth at least $33M MRAM is a call option Out of the money: o Dont want to use option now, but you might sometime in the future Option pricing using Black Scholes Model: o Inputs: Volatility (% SD) Short term interest rate Time to expiration Exercise price, current price It is worth more than $33M...
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