Lastassignment

Lastassignment - Question 1 Metallgesellschaft a Hypothetically speaking Arthur Benson decided to in lieu of selling long term forward contracts to

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Question 1: Metallgesellschaft a.) Hypothetically speaking, Arthur Benson decided to, in lieu of selling long‐ term forward contracts, to sell longterm 5% OTM call options to his clients. In particular, he sold to one client, the option to buy one million barrels of oil every year, for the next t en years. Assuming the prices for oil given on January 3rd 1990, what is the premium he charged to the clients for the whole option package and ho w many barrels of oil does he need to hedge t risk exposure? Use the risk‐free rate at the i ze. time and the current option specifications given by NYMEX for the contract s(Hint: You have to come up with the appropriate volatility) b.) In review of the Metallgesellschaft’s case, please describe why the trading strategy was f undamentally sound, but empirically flawed. Question 2: Proctor and Gamble a.) Let us assume that P&G entered into the 1st swap agreement and did not terminate the agreement. Calculate the periodic cash flows t o each firm assuming the swap was
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This note was uploaded on 12/14/2011 for the course FIN 5515 taught by Professor Staff during the Spring '10 term at FSU.

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Lastassignment - Question 1 Metallgesellschaft a Hypothetically speaking Arthur Benson decided to in lieu of selling long term forward contracts to

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