principles of corporate finance understanding options

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1、confirmingpagesPART6CHAPTER"""""20OPTIONSUnderstandingOptions!Popquiz:WhatdothefollowingeventshaveinCompaniesregularlyusecommodity,currency,andcommon?interest-rateoptionstoreducerisk.Forexample,ameatpackingcompanythatwishestoputaceilingon•Thecoffeeroaster,GreenMountain,buysoptionst

2、hecostofbeefmighttakeoutanoptiontobuylivecattlethatputaceilingonthepricethatitwillpayforitsatafixedprice.Acompanythatwishestolimititsfuturefuturepurchasesofbeans.borrowingcostsmighttakeoutanoptiontoselllong-•Flatironoffersitspresidentabonusifthecompany’stermbondsatafixedprice.Andso

3、on.InChapter26westockpriceexceeds$120.explainhowfirmsemployoptionstolimittheirrisk.•BlitzenComputerdipsatoeinthewaterandentersManycapitalinvestmentsincludeanembeddedanewmarket.optiontoexpandinthefuture.Forinstance,thecompanymayinvestinapatentthatallowsittoexploit•MaltedHerringpostp

4、onesinvestmentinapositive-anewtechnologyoritmaypurchaseadjoininglandNPVplant.thatgivesittheoptioninthefuturetoincreasecapacity.•Hewlett-PackardexportspartiallyassembledIneachcasethecompanyispayingmoneytodayprinterseventhoughitwouldbecheapertoshipthefortheopportunitytomakeafurtherin

5、vestment.Tofinishedproduct.putitanotherway,thecompanyisacquiringgrowth•Dominioninstallsadual-firedunitatitsPossumopportunities.PointpowerstationthatcanuseeitherfueloilorHereisanotherdisguisedoptiontoinvest:Youarenaturalgas.consideringthepurchaseofatractofdesertlandthat•In2004AirFra

6、nceacquirestheDutchairline,KLM,isknowntocontaingolddeposits.Unfortunately,theinexchangeforapackageofAirFrancesharesandcostofextractionishigherthanthecurrentpriceofwarrants.ThewarrantsentitleKLM’sshareholdersgold.Doesthismeanthelandisalmostworthless?tobuyadditionalAirFrancesharesfor

7、€20eachNotatall.Youarenotobligedtominethegold,butwithinthennext3.5years.ownershipofthelandgivesyoutheoptiontodoso.Ofcourse,ifyouknowthatthegoldpricewillremain•InFebruary2008ChiquitaBrandsissues$200belowtheextractioncost,thentheoptionisworthless.millionof4.25%convertiblebondsmaturin

8、ginButifthereisuncertainty