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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