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Hedging Decisions

Your company has invested $6 million in a new Trilithium crystal technology project. The company will generate huge profits if the project is successful. As a risk hedge, the CFO decides to purchase equal risk derivatives. She buys two hundred 1-year put option contracts with an exercise price of $50. The cost of the option is $3.50 per share. Eight months later, the Trilithium crystal project is a big success and the current price of the underlying security is $66. She decides to sell the option at that time for $1.25 per share. How much has she made (or lost) on the hedging decision?

 

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M928661

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