A car manufacturing company and his financial analyst is of the view that the price of steel
Question:
A car manufacturing company and his financial analyst is of the view that the price of steel will increase significantly over the next 3 months due to an international shortage during the COVID19 pandemic. The car manufacturing company is a net buyer of steel.
Should the investor want to hedge his position, what type of European option contract would you suggest he enters into? Explain your answer?
Let's assume that the investor enters into an option contract at a strike price of $25 with an option price of $3. At the expiration of the option explain when the investor will exercise its right.
If the spot price turns out to be $20 at expiration, what is the profit or loss to the writer (short) of the option?
If the spot price turns out to be $30 at expiration, what is the profit or loss to the holder (Long) of the option?
Expert Answer:
1 To hedge the position the investor should consider entering into a European put option contract A ... View the full answer
