BioTech needs to sell crude oil in six months. The management has estimated that the firm would go bankrupt if the price of oil were to decrease to $60 per barrel. The current price of oil is $75 per barrel. The firms chief financial officer believes that the price of gold will either rise to $100 or fall to $50 a barrel over the next six months. Management wishes to eliminate any risk of the firm going bankrupt. BioTech can borrow and lend at the risk-free effective annual rate of 8.00 percent.

1. Should the company buy a call option or a put option on crude oil? To avoid bankruptcy and to minimize the cost of hedging, what strike price and time to expiration would the company like this option to have? Explain.