D plc currently has $20 million in excess cash and no debt. The company expects to generate additional free cash flows of $30 million per year in subsequent years. D plcs unlevered cost of capital is 10% and there are 10 million shares outstanding.

1. Assuming in perfect capital markets, if the firm uses $20 million of its cash to repurchase shares today, what is the new price per share and how many shares must be repurchased?

A financial institution holds 200,000 shares in D plc and is considering buying some put options to hedge her investment. The premium of put options is 1.

She requires European put options with an exercise price of 30 for exercise in two years time.

Required:

2. Explain three types of risks incurred by Financial Institutions.
3. Calculate the investor's change in wealth if she buys 200,000 put options to hedge her

portfolio and the share price in two years time is

1. 25 per share or
2. 35 per share.

1. Discuss the positions of seller of the put option.
2. Explain the concept ofout of the money , at the money and in the money