Question:
Your company has invested $6 million in a new Trilithium crystal technology project. The company will generate huge profits if the project is successful. As a risk hedge, the CFO decides to purchase equal risk derivatives. She buys two hundred 1-year put option contracts with an exercise price of $50. The cost of the option is $3.50 per share. Eight months later, the Trilithium crystal project is a big success and the current price of the underlying security is $66. She decides to sell the option at that time for $1.25 per share. How much has she made (or lost) on the hedging decision?