10. Applications of option pricing to corporate finance

Fantasy Inc. plans to issue $450 million of bonds in 12 months to build a new plant. If interest rates dont rise, the plant will be profitable. Otherwise, it will be unprofitable.

Fantasy has an option similar to a option, which enables it to minimize the risk by taking the following action:

Hedge against rising rates by selling a put option on Treasury bonds.

Hedge against rising rates by purchasing a call option on Treasury bonds.

Undertake the project anyway because interest rates always fall.

Hedge against rising rates by purchasing a put option on Treasury bonds.