(b) TWhat is the option's time value? (c) What would a time value of zero indicate? What is the value of an option with zero time value? (d) Using a trial and error approach, calculate how low the stock price would have to be for the time value of the option to be zero. 6. (Hull, 3.22] It is now June. A company knows that it will sell 5,000 barrels of crude oil in September. It uses the October CME Group futures contract to hedge the price it will receive. Each contract is on 1,000 barrels of "light sweet crude." What position should it take? What price risk is it still exposed to after taking the position? 7. Assume the interest rate is 4% per annum with semiannual compounding, the 6- month forward price for company XYZ is $1020, and use these premiums for XYZ options with 6 months to expiration: Strike 1 Call 1 Put $950 $120405 $51.77? 1000 93.809 74.201 1020 84.470 84.470 1050 71.802 101.214 1107 51.873 137.167 Be sure to account for the interest cost of each position when you compute prot. (a) Suppose you buy the XYZ stock for $1000 and buy a 950-strike put. Construct payoff and profit diagrams for this position. Verify that you obtain the same payoff and profit diagram by investing $931.37 in zero-coupon bonds and buying a 950-strike call. (b) Suppose you invest in the XYZ stock for $1000, buy a 950strike put, and sell a 1050-strike call. Draw a prot diagram for this position. What is the net option premium? If you wanted to construct a zero-cost collar keeping the put strike equal to $950, in what direction would you have to change the call strike? 8. Natick, MA and Indianapolis, IN (January 25, 2006) Boston Scientic Corpora- tion (NYSE: BSX) and Guidant Corporation (NYSE: GDT) today announced that the Board of Directors of Guidant has unanimously approved and entered into the merger agreement provided to Guidant by Boston Scientific on January 17, 2006. Under that agreement, Boston Scientic will acquire all the outstanding shares