The options traded on the exchanges are standardized

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Unformatted text preview: and sales of both call and put options can be made in an orderly fashion. The options traded on the exchanges are standardized, and the price at which they trade is determined by the forces of supply and demand. Call and put options do not play a direct role in the fund-raising activities of the financial manager. On the other hand, currency options can be used to hedge the firm’s foreign currency exposures resulting from international transactions. LG6 (Solutions in Appendix B) Lease versus purchase The Hot Bagel Shop wishes to evaluate two plans, leasing and borrowing to purchase, for financing an oven. The firm is in the 40% tax bracket. Lease The shop can lease the oven under a 5-year lease requiring annual endof-year payments of $5,000. All maintenance costs will be paid by the lessor, and insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $4,000 at termination of the lease. Purchase The oven costs $20,000 and will have a 5-ye...
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