ABC Corp. mines copper, with A?¬xed costs of $0.60/lb and variable cost of $0.30/lb. The 1-year forward price of copper is $1.10/lb. The 1-year effective annual interest rate is 6.2%. One-year option prices for copper are shown in the table below.
Strike Call Put
0.9500 $0.0649 $0.0178
0.9750 0.0500 0.0265
1.0000 0.0376 0.0376
1.0250 0.0274 0.0509
1.0340 0.0243 0.0563
1.0500 0.0194 0.0665
In your answers, consider copper prices in 1 year of $0.70, $0.80, $0.90, $1.00, $1.10, and $1.20.
1. If ABC Corp. does nothing to manage copper price risk, what is its proA?¬t one year from now, per pound of copper? If on the other hand ABC Corp. sells forward its expected copper production, what is its estimated proA?¬t one year from now? Construct a table for the two scenarios.
2. Assume the 1-year copper forward price were $0.90 instead of $1.10. If ABC Corp. were to sell forward its expected copper production, what is its estimated proA?¬t one year from now? What if the forward copper price is $0.60? Should ABC Corp. produce copper? Construct tables for the scenarios.
3. Using table, compute estimated proA?¬t in 1 year if ABC Corp. buys a put option with a strike of $1.00.
4. Using table, compute estimated proA?¬t in 1 year if ABC Corp. sells a call option with a strike of $1.00.
5. Using table, compute estimated proA?¬t in 1 year if ABC Corp. buys collars with the following strikes:
a) $0.95 for the put and $1.00 for the call
b) $0.975 for the put and $1.025 for the call
c) $1.05 for the put and $1.05 for the call
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