7 a firm will have to declare bankruptcy if they don t produce at leas
7. A firm will have to declare bankruptcy if they don't produce at least $100 at time=T. They will have to pay legal fees equal to 30% of the shortfall (30% of $100 - CF₁). The firm's cash flows are a function of general economic conditions. Specifically, the firm will produce the cash flows below, which are a function of the market index. r=0%.
What is the unhedged firm worth today? (make sure you take bankruptcy costs into account) 7.b. What positions in what derivatives will completely hedge the firm's cash flows (specify the derivatives (forwards/calls/puts), whether you are long or short, exercise prices, etc 7.c, d, & e. Fill in the columns below. Please show your work below the table.
7.f. What is the hedged firm worth today?
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