18. You are the CFO of a plastics manufacturer that is preparing to launch a high-end...

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18. You are the CFO of a plastics manufacturer that is preparing to launch a high-end thermos division next year (t=1). The project has a discount rate of 8% and has a NPV today (t=0) of $12M. If you wait one year for market research, there is 40 percent chance that the NPV next year (t=1) could be $30M and 60 percent chance that you can auction off the division for $2M. What is the value of the option to wait? 2 Options 19. You are the Senior Treasury Advisor for the athletic shoe company SWTY. Your company wants to reduce the volatility of its cash flows by making its cash flows less sensitive to large changes in rubber. It will do so by buying a call option on a rubber ETF with a strike price $60 and buying a put option on a rubber ETF with a strike price of $40. Both options are European and expire in one year. Suppose that one year passes and the rubber ETF trades at $30 per share. What is the payoff of this option strategy? 20. You are the Senior Treasury Advisor for the athletic shoe company SWTY. Your company wants to reduce the volatility of its cash flows by making its cash flows less sensitive to large changes in rubber. It will do so by buying a call option on a rubber ETF with a strike price $60 and buying a put option on a rubber ETF with a strike price of $40. Both options are European and expire in one year. Suppose that you can create the same portfolio with American options. What is the expected cost of this option strategy? Higher, Equal, Lower 21. You are the Senior Treasury Advisor for the athletic shoe company SWTY. Your company wants to reduce the volatility of its cash flows by making its cash flows less sensitive to large changes in rubber. It will do so by buying a call option on a rubber ETF with a strike price $60 and buying a put option on a rubber ETF with a strike price of $40. Both options are European and expire in one year. Suppose that you are only worried about the price of rubber increasing. What should you do to your option strategy? Sell the call, Sell the put, Do nothing 22. You are the Senior Treasury Advisor for the athletic shoe company SWTY. Your company wants to reduce the volatility of its cash flows by making its cash flows less sensitive to large changes in rubber. It will do so by buying a call option on a rubber ETF with a strike price $60 and buying a put option on a rubber ETF with a strike price of $40. Both options are European and expire in one year. Suppose that you think a better option strategy would be to sell your put and to enter a bull spread, by continuing to hold your call with a strike price of $60 and selling a call with a strike price of $70. Your new option strategy would protect you from? Rubber prices going down, Rubber prices going up, Rubber prices staying stable. 18. You are the CFO of a plastics manufacturer that is preparing to launch a high-end thermos division next year (t=1). The project has a discount rate of 8% and has a NPV today (t=0) of $12M. If you wait one year for market research, there is 40 percent chance that the NPV next year (t=1) could be $30M and 60 percent chance that you can auction off the division for $2M. What is the value of the option to wait? 2 Options 19. You are the Senior Treasury Advisor for the athletic shoe company SWTY. Your company wants to reduce the volatility of its cash flows by making its cash flows less sensitive to large changes in rubber. It will do so by buying a call option on a rubber ETF with a strike price $60 and buying a put option on a rubber ETF with a strike price of $40. Both options are European and expire in one year. Suppose that one year passes and the rubber ETF trades at $30 per share. What is the payoff of this option strategy? 20. You are the Senior Treasury Advisor for the athletic shoe company SWTY. Your company wants to reduce the volatility of its cash flows by making its cash flows less sensitive to large changes in rubber. It will do so by buying a call option on a rubber ETF with a strike price $60 and buying a put option on a rubber ETF with a strike price of $40. Both options are European and expire in one year. Suppose that you can create the same portfolio with American options. What is the expected cost of this option strategy? Higher, Equal, Lower 21. You are the Senior Treasury Advisor for the athletic shoe company SWTY. Your company wants to reduce the volatility of its cash flows by making its cash flows less sensitive to large changes in rubber. It will do so by buying a call option on a rubber ETF with a strike price $60 and buying a put option on a rubber ETF with a strike price of $40. Both options are European and expire in one year. Suppose that you are only worried about the price of rubber increasing. What should you do to your option strategy? Sell the call, Sell the put, Do nothing 22. You are the Senior Treasury Advisor for the athletic shoe company SWTY. Your company wants to reduce the volatility of its cash flows by making its cash flows less sensitive to large changes in rubber. It will do so by buying a call option on a rubber ETF with a strike price $60 and buying a put option on a rubber ETF with a strike price of $40. Both options are European and expire in one year. Suppose that you think a better option strategy would be to sell your put and to enter a bull spread, by continuing to hold your call with a strike price of $60 and selling a call with a strike price of $70. Your new option strategy would protect you from? Rubber prices going down, Rubber prices going up, Rubber prices staying stable.