It is now June. A company knows that it will sell 5,000 barrels of crude oil...

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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 Call Put $950 $120.405 $51.777 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 profit. (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 950-strike put, and sell a 1050-strike call. Draw a profit diagram for this position. What is the net. option premium? If you wanted to construct a zero-cost collar keeping the put strike exqual to $950, in what direction would you have to change the call strike? 8. Natick, MA and Indianapolis, IN (January 25, 2006) - Boston Scientific 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 Scientific will acquire all the outstanding shares- 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 Call Put $950 $120.405 $51.777 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 profit. (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 950-strike put, and sell a 1050-strike call. Draw a profit diagram for this position. What is the net. option premium? If you wanted to construct a zero-cost collar keeping the put strike exqual to $950, in what direction would you have to change the call strike? 8. Natick, MA and Indianapolis, IN (January 25, 2006) - Boston Scientific 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 Scientific will acquire all the outstanding shares-

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