# Question

Suppose the 1-year copper forward price were $0.80 instead of $1. If XYZ were to sell forward its expected copper production, what is its estimated profit 1 year from now? Should XYZ produce copper? What if the forward copper price is $0.45?

•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.

•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.

## Answer to relevant Questions

Use the same assumptions as in the preceding problem, without the bid-ask spread. Suppose that we want to construct a paylater strategy using a ratio spread. Instead of buying a 440-strike call, Auric will sell one ...Suppose that price and quantity are positively correlated as in this table: There is a 50% chance of either price. The futures price is $2.50. Demonstrate the effect of hedging if we do the following: a. Short the expected ...Compute estimated profit in 1 year if Telco sells a put option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case. •XYZ mines copper, with fixed costs of $0.50/lb and variable cost of ...Suppose the S&P 500 currently has a level of 875. The continuously compounded return on a 1-year T-bill is 4.75%. You wish to hedge an $800,000 portfolio that has a beta of 1.1 and a correlation of 1.0 with the S&P 500. a. ...Repeat the previous problem, assuming that the dividend yield is 1.5%.Post your question

0