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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 and volatility Assume gold price risk is
diversifiable, and the riskless rate is continuously compounded
Consider a firm with outstanding debt that has promised to repay next year principal
plus interest If the firm files for bankruptcy, bankruptcy costs are 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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