If there is how would you do it c how much does the

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option with identical payoffs to the put option just described? If there is, how would you do it? c. How much does the synthetic put option cost? Is this greater than, less than, or equal to what the actual put option costs? Does this make sense? 3. Maverick Manufacturing, Inc., must purchase gold in three months for use in its operations. Maverick’s management has estimated that if the price of gold were to rise above $875 per ounce, the firm would go bankrupt. The current price of gold is $815 per ounce. The firm’s chief financial officer believes that the price of gold will either rise to $975 per ounce or fall to $740 per ounce over the next three months. Management wishes to eliminate any risk of the firm going bankrupt. Maverick can borrow and lend at the risk-free effective annual rate of 6.50 percent. a. Should the company buy a call option or a put option on gold? To avoid bankruptcy and to minimize the cost of hedging, what strike price and time to expiration would the company like this option to have? b. How much should such an option sell for in the open market? 4. A company’s asset is worth 20 now, and will be worth 16 (in the bad state) or 24 (in the good state) with equal probabilities tomorrow. The riskfree interest rate is 10%.
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  • Fall '12
  • Stefina
  • Economics, effective annual rate, Strike price

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Christopher Reinemann
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