10. Applications of option pricing to corporate finance

Lumia Inc. plans to issue $450 million of bonds in 18 months to build a new plant. If interest rates don't rise, the plant will be profitable. Otherwise, it will be unprofitable.

Lumia has an option similar to a _________ (Call or Put)option, which enables it to minimize the risk by taking the following action:

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

B)Undertake the project anyway because interest rates always fall.

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

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