4) Maverick Manufacturing PLC must purchase gold in three months for use in its operations. Maverick’s management has es
Posted: Thu May 19, 2022 8:01 am
4) Maverick Manufacturing PLC 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 $875 per ounce, the firm
would go bankrupt. The current price of gold is $850 per ounce. The
firm's chief financial officer believes that the price of gold will
either rise to $900 per ounce or fall to $825 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
APR of 16.99%.
a) Should the company buy a call or a put option on gold? To
avoid bankruptcy, what time to expiration would the company like
this option to have?
b) how much should such an option sell for in the open
market?
c) If no options currently trade on gold, is there a way for the
company to create a synthetic option with identical payoffs to the
option just described? If there is, how would the firm do it?
d) How much does the synthetic option cost? Is this greater
than, less than or equal to what the actual option costs? Does this
make sense?
for use in its operations. Maverick’s management has estimated that
if the price of gold were to rise above $875 per ounce, the firm
would go bankrupt. The current price of gold is $850 per ounce. The
firm's chief financial officer believes that the price of gold will
either rise to $900 per ounce or fall to $825 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
APR of 16.99%.
a) Should the company buy a call or a put option on gold? To
avoid bankruptcy, what time to expiration would the company like
this option to have?
b) how much should such an option sell for in the open
market?
c) If no options currently trade on gold, is there a way for the
company to create a synthetic option with identical payoffs to the
option just described? If there is, how would the firm do it?
d) How much does the synthetic option cost? Is this greater
than, less than or equal to what the actual option costs? Does this
make sense?