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Risk Management: Hedging

1. Mr. Goodie holds American put options on Delta Triangle stock. The exercise price of the put is $40 and Delta stock is selling for $35 per share. If the put sells for $4.5, what is the best strategy for Mr. Goodie?

2. A classmate of yours recently entered the import/export business. During a visit with him last week, he said to you, "If you play the game right, this is the safest business in the world. By hedging all my transactions in the foreign-exchange futures market, I eliminate all risk." Do you agree with your friend's assessment of hedging? Why or why not?

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1. Mr. Goodie holds American put options on Delta Triangle stock. The exercise price of the put is $40 and Delta stock is selling for $35 per share. If the put sells for $4.5, what is the best strategy for Mr. Goodie?

The alternatives are:
a) Buy the stock for $35, exercise the put option and sell the stock to the option seller for the strike price of $40. Payoff= $40 -$35=$5
b) Sell the put option for $4.5
c) Wait. The stock price may go below $35 in which case the payoff may be greater than $ 5 that is obtained with alternative a)

If there is likelihood of the stock price going ...

Solution Summary

Answers to 2 questions on hedging.

$2.19