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  3. two months ago, firm x was responsible for a major

Two months ago, firm X was responsible for a major environmental catastrophe. The stock price...

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Accounting

  1. Two months ago, firm X was responsible for a major environmental catastrophe. The stock price for X has fallen significantly since then. There is uncertainty about what the financial damage to the company will be in the future but there is a general expectation that they will pay a fine of $1 billion. You believe that this fine could be much higher but also a chance to be much lower. What derivative strategy should you pursue? What would the dollar profit be on that strategy if the ending stock price ends up being 130 at the expiration of the options and you invested $100,000 (ignoring transaction costs)?

Exercise Prices

X = 100

X = 105

Call Premium

14.23

11.98

Put Premium

9.05

11.86

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