Maverick Manufacturing Ltd. must purchase gold in three months for use in its operations. Maverick's management has estimated that if the price of gold were to rise above $1,625 per ounce, the firm would go bankrupt. The current price of gold is $1,545 per ounce. The firm's chief financial officer believes that the price of gold will either rise to $1,795 per ounce or fall to $1,435 per ounce over the next three months. Management wishes to eliminate any risk of the firm going bankrupt. Maverick can borrow and lend at the risk-free EAR of 6.50 percent. a-1. Should the company buy a call option or a put option on gold? Call option Put option a-2. What strike price would the company like this option to have? (Do not round intermediate calculations. Omit $ sign in your response.) Strike price 1625 b. How much should such an option sell for in the open market? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) Open market $ c. Suppose no options currently trade on gold. What are the transactions needed to create a synthetic option with identical payoffs to a traded option? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) c-1. (Click to select) shares of stock c-2. Amount to (Click to select) $ d. How much does the synthetic option cost? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) Synthetic option $
Maverick Manufacturing Ltd. must purchase gold in three months for use in its operations. Maverick's management has estimated that if the price of gold were to rise above $1,625 per ounce, the firm would go bankrupt. The current price of gold is $1,545 per ounce. The firm's chief financial officer believes that the price of gold will either rise to $1,795 per ounce or fall to $1,435 per ounce over the next three months. Management wishes to eliminate any risk of the firm going bankrupt. Maverick can borrow and lend at the risk-free EAR of 6.50 percent. a-1. Should the company buy a call option or a put option on gold? Call option Put option a-2. What strike price would the company like this option to have? (Do not round intermediate calculations. Omit $ sign in your response.) Strike price 1625 b. How much should such an option sell for in the open market? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) Open market $ c. Suppose no options currently trade on gold. What are the transactions needed to create a synthetic option with identical payoffs to a traded option? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) c-1. (Click to select) shares of stock c-2. Amount to (Click to select) $ d. How much does the synthetic option cost? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.) Synthetic option $
Chapter17: The Management Of Cash And Marketable Securities
Section: Chapter Questions
Problem 2P
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Transcribed Image Text:Maverick Manufacturing Ltd. must purchase gold in three months for use in its operations. Maverick's management has estimated that
if the price of gold were to rise above $1,625 per ounce, the firm would go bankrupt. The current price of gold is $1,545 per ounce.
The firm's chief financial officer believes that the price of gold will either rise to $1,795 per ounce or fall to $1,435 per ounce over the
next three months. Management wishes to eliminate any risk of the firm going bankrupt. Maverick can borrow and lend at the risk-free
EAR of 6.50 percent.
a-1. Should the company buy a call option or a put option on gold?
O Call option
○ Put option
a-2. What strike price would the company like this option to have? (Do not round intermediate calculations. Omit $ sign in your
response.)
Strike price
$
1625
b. How much should such an option sell for in the open market? (Do not round intermediate calculations. Round the final answer to
2 decimal places. Omit $ sign in your response.)
Open market
$
c. Suppose no options currently trade on gold. What are the transactions needed to create a synthetic option with identical payoffs to
a traded option? (Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your
response.)
c-1. (Click to select) ☑
c-2. Amount to (Click to select)
shares of stock
$
d. How much does the synthetic option cost? (Do not round intermediate calculations. Round the final answer to 2 decimal places.
Omit $ sign in your response.)
Synthetic option
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