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Consider a firm that will produce one unit of gold a year from today. The price of gold next year is normally distributed with mean

Consider a firm that will produce one unit of gold a year from today. The price of gold next
year is normally distributed with mean 427 and volatility 100. Assume gold price risk is
diversifiable, and the riskless rate is 5%(continuously compounded).
Consider a firm with outstanding debt that has promised to repay 300 next year (principal
plus interest). If the firm files for bankruptcy, bankruptcy costs are 50. Assume that the firm
pays no taxes, so that the value of the firm is the expected discounted value of its cash flow
less the expected discounted value of bankruptcy costs.
Suppose that the firm hedges its gold price risk by selling a forward contract on gold. Find
the value of the hedged levered firm.
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