Question: Question 6 Telstra has borrowed a variable interest rate loan from ANZ. The management is concerned that a rise in interest rate could reduce profitability.

Question 6

  1. Telstra has borrowed a variable interest rate loan from ANZ. The management is concerned that a rise in interest rate could reduce profitability. How can Telstra use a financial instrument to manage the risk?

  1. Peter bought a call option on Telstra shares with an exercise price of $60 and an expiry date of three months, as well as a put option on Telstra shares with the same exercise price and same expiration date. The market price for Telstra shares today is $57.20. The call price is trading at $1.45. The put price is trading at $3.70.
    • Draw a fully labelled diagram for the payoff of the call option.
    • Draw a fully labelled diagram for the payoff of the put option.
  • What will the Telstra share price be at the expiration date so that Peter can make an overall profit from the two options?

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