Consider a stock (XYZ Corporation) currently trading at $50, with annualized volatility of 65%. The continuously compounded annualized interest rate…


Suppose Nova virus is a tropical disease carried by Nova mosquitoes, bugs which are otherwise harmless. XYZ Corporation is developing an environmentally safe pesticide that kills Nova mosquitoes. ABC Corporation is developing a vaccine for Nova virus. ABC management is nervous about the terms on which they will be able to raise equity and is considering hedges based on XYZ corporation stock.

b.    How do you expect XYZ stock price movements to be correlated with ABC’s business prospects? Explain why.

c.     Discuss ways ABC can hedge its risk using instruments tied to XYZ, given your assumption about how XYZ stock price movements are correlated with ABC’s business prospects. Specifically, how can ABC hedge using an XYZ call? An XYZ put? An XYZ forward? XYZ stock? In each case, discuss how ABC would use that instrument ALONE—not in combination with other derivatives.  

d.    The CEO of ABC has heard about spread positions and wants to use one. Would you recommend a bull spread or a bear spread on XYZ stock? 

e.    Based on your recommendation in (c), construct a spread of that type using the options from (a). Graph the profit in 1 year as a function of the price of XYZ in one year. Be sure to label the maximum profit, the minimum profit, and the breakeven point(s).

f.     Does this strategy fully solve ABC’s risk management problem? Explain why or why not.

Show more

Calculate Your Essay Price
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
The price is based on these factors:
Academic level
Number of pages
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more

Order your essay today and save 10% with the coupon code: best10

Academic Pros