Compute estimated profit in 1 year if Telco sells collars
Compute estimated profit in 1 year if Telco sells 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. \$0.95 for the put and \$0.95 for the call.
Draw a graph of profit in each case.
•XYZ mines copper, with fixed costs of \$0.50/lb and variable cost of \$0.40/lb.
•Wirco produces wire. It buys copper and manufactures wire. One pound of copper can be used to produce one unit of wire, which sells for the price of copper plus \$5. Fixed cost per unit is \$3 and noncopper variable cost is \$1.50.
•Telco installs telecommunications equipment and uses copper wire fromWirco as an input. For planning purposes, Telco assigns a fixed revenue of \$6.20 for each unit of wire it uses.
The 1-year forward price of copper is \$1/lb. The 1-year continuously compounded interest rate is 6%. One-year option prices for copper are shown in the table below.17
In your answers, at a minimum consider copper prices in 1 year of \$0.80, \$0.90, \$1.00, \$1.10, and \$1.20.
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