Cephalon, Inc.

Cephalon, Inc.: "

In early 1997, Cephalon, awaited an FDA panel's decision on whether its drug, Myotrophin, would be approved. If the drug was approved, the firm might need substantial additional funds to commercialize as well as to buy back rights to it (which had been sold earlier to finance its development). The firm's CFO is considering a variety of financing strategies, including buying call options on the firm's own stock and paying for those options by issuing shares at the current time.

Learning Objective: To introduce students to the use of equity derivatives as part of a risk-management strategy, to examine the application of cash-flow hedging in a corporate context, and to examine the pricing of a derivative security with large jump risk.

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