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Home / Questions / ABC Corp. mines copper, with A?¬xed costs of \$0.60/lb and variable cost of \$0.30/lb. The

ABC Corp. mines copper, with A?¬xed costs of \$0.60/lb and variable cost of \$0.30/lb. The

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

Dec 02 2019 View more View Less