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(a) You are working as a risk manager for Bombardier Inc.
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(a) You are working as a risk manager for Bombardier Inc. The firm has just signed a 1 billion USD contract for the sale of 12 airplanes to a customer in California. Each airplane costs 80 million CAD to produce. Both the revenues from the sale and the total cost of production are assumed to be paid in two years, when the planes are delivered. The management team is concerned that a devaluation in the USD affects the firm's operating profit. Your task is to use options to ensure that the operating profit on the contract be at least 10 million CAD in two years. Using option contracts (each option represents 10,000 USD), show how you can implement this objective. Describe your strategy carefully, i.e., what type(s) of options do you buy/sell and in what quantities.
(b) You now work as an option trader and want to invest in a portfolio of call options on AAPL stock. All options have a maturity of 1 year and we denote by C(X) a call option with a strike price of X. You consider the following strategy: buy 1 C(X = 50), sell 3 C(X = 150), buy 1 C(X = 200), buy 1 C(X = 250).
i. What is the gross payoff diagram of the portfolio at maturity. What is the gross payoff if the stock price of AAPL is $180 in a year?
ii. Implement the same payoff diagram using put options and one-year zero coupon bonds.