1. To hedge its exposure to the price of oil, an airline buys a call option on oil with the exercise price Kc and sells a put option with the exercise price Kp (Kp < Kc). Both contracts have the same size chosen such as to hedge the entire exposure, and their premiums are equal. On a diagram, show
a) The unhedged exposure as a function of the future spot price of oil
b) The gain from the call option as a function of the future spot price of oil
c) The gain from the put option as a function of the future spot price of oil
d) The hedged exposure as a function of the future spot price of oil
2. The miller house company needs $1.2 million 3 years from now to purchase some new equipment currently they have some extra cash and would like to establish a savings account for this purpose. the account pays 7 percent interest compounded semi-annually. how much money must the company deposited today to fully fund the equipment purchase?
a. $971,834.69
b. $972,009.16
c. $976,200.77
d. $979,557.45