a)Maxi Hedge Fund has a substantial position in Carol shares. The share price has been volatile over
Question:
a)Maxi Hedge Fund has a substantial position in Carol shares. The share price has been volatile over the past 6 months, and a group of equity analysts working in the fund believe that the price may drop substantially over the next 4 months before recovering. Suggest two risk minimization strategies that Maxi Hedge Fund can be adopted. In your answer explain the derivative product that would be used, the position taken, and the cash flows at maturity.
b)A company requires funding for a new factory. The company only has access to a debt facility that offers floating rate loans. However, given that the company is concerned about interest rates potentially rising in the future, it prefers a fixed rate loan. Provide advice to the company on its options.
c)Eason bought an option contract on DHC shares with an exercise price of $50 and an expiry date in one month. The market price for DHC shares today is $47.81. The call price is trading at $0.35.
i.Calculate the break-even amount for the call position and draw a fully labelled diagram for both buyer of the option and seller of the option.
ii.At what minimum share price will the option buyer exercise the option on the expiration date? Provide reasoning in your answer.
Value at Risk The New Benchmark for Managing Financial Risk
ISBN: 978-0071464956
3rd edition
Authors: Philippe Jorion