Applications of option pricing to corporate finance

Grotesque Inc. plans to issue $$250$ million of bonds in $6$ months to build a new plant. If interest rates don't rise, the plant will be profitable. Otherwise, it will be unprofitable.

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

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

Undertake the project anyway because interest rates always fall.

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

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