Some years ago the Australian firm Bond Corporation sold a share in some land that it owned near Rome for $110 million and as a result boosted its annual earnings by $74 million. A television program subsequently revealed that the buyer was given a put option to sell its share in the land back to Bond for $110 million and that Bond had paid $20 million for a call option to repurchase the share in the land for the same price.
a. What happens if the land is worth more than $110 million when the options expire? What if it is worth less than $110 million?
b. Use position diagrams to show the net effect of the land sale and the option transactions.
c. Assume a one-year maturity on the options. Can you deduce the interest rate?
d. The television program argued that it was misleading to record a profit on the sale of land. What do you think?
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