-2- The value of a share.

-3- The firm is thinking of issuing another five million shares how will this impact -2- 

-4- Should a shareholder be in favor of the new issuance (-3-), if the firm invests in a project that it expects will grow FCF by an additional $2 million per year through year 10.

-5- What will the value of the stock be if the firm is right?

-6- You think there is a 50% chance that the firm is right, but an equal chance profit will stop growing in year 7.  Would you buy the firm at the price you found in -2-?

-7- What is the highest price you’d pay for the stock?  Why?

IV           20%       For thought

-1- One can buy or sell a call or a put, whether call or put, what distinguishes the seller of the product?

-2- In 1999 Southwest Airlines bought profitable options for jet fuel, several years into the future. 

-a- In your own words what was the purpose of this program?

-b- What types of risks did Southwest face in these agreements?

-3- In 2008 the New York MTA lost a lot of money on swaps when interest rates moved unexpectedly in the wake of the Financial Crisis.

-a- In your own words, what was the purpose of the MTA swaps program?

-b- What types of risks did MTA face in these agreements?

-4- Given the experiences of MTA and Southwest, how would you advise a firm to consider hedging in options markets?

-5- Clearing houses act to connect buyers and sellers and they backstop agreements. Considering the 2019 experience of Nasdaq Clearing – what do you think the lessons are for a firm like Southwest or MTA when dealing in options through a clearing house?