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PROBLEM 1: You are the head of risk management for a major airline. The forward price of oil for August is $56 per barrel, the
PROBLEM 1: You are the head of risk management for a major airline. The forward price of oil for August is $56 per barrel, the premium for an August $56 put option is $3.85, and the premium for an August $56 call option is $2.95. Construct a \"cap\" to hedge the airline's August oil purchases, using a risk-free rate of 2% for 6 months (February to August). Ignore commissions, margins, and other transaction costs. a) Show the prot table for the hedge involving the cap over a range of oil prices from $44 to $68 in $2 increments, and then answer these questions: What is the maximum prot (per barrel) over this range of prices? What is the maximum loss (per barrel) over this range of prices? At what oil price does the airline break even (net prot = $0) on this strategy? What synthetic option position is created by the cap
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