1. Rick owns stock in a retailer that he believes is highly undervalued. Rick expects that the stock will increase in value nicely over the long term. He is? concerned, however, that the entire retail industry may fall out of favor with investors as some larger companies report falling sales. There are no options traded on his? stock, but Rick would like to hedge against his fears about retail. He locates a symbol? RTH, which is a Retail HOLDRS. Can Rick hedge against the risk he is concerned with by using? RTH? Using? options?
A. To hedge the? risk, Rick can either short RTH or use put options on RTH.
B. To hedge the? risk, Rick can either take a long position in RTH or use call options on RTH.
C. To hedge the? risk, Rick can either short RTH or use call options on RTH.
D. To hedge the? risk, Rick can either take a long position in RTH or use put options on RTH.
2. Consider a project will free cash flows in one year of either $150,000 or $180,000, with either outcome being equally likely. The initial investment for this project is $100,000, and the project's cost of capital is 18%. What is the net present value of this project?
A. $40,987.54
B. $0
C. $165,000
D. $29,167.67
E. $38,830.51