Problem 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?
Problem 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?