1. Acme Inc. makes a component part called a gizmo used in iPhones. These parts are made of copper. Acme Inc. can sell each of the gizmos to Apple for 100. Each gizmo uses 1 oz. of copper. All sales and production costs occur one year from today. Therefore, the pre-hedge profit per gizmo is given by: 100 X, where X is the price of 1 oz. of copper 1 year from now.

If Acme uses a one-year (long) forward contract per gizmo to hedge their exposure to price fluctuations, they can guarantee a profit of 35 per gizmo sold.

They prefer to keep some upside profit potential, so instead they will use a one-year (long) call option on copper with a strike price equal to the current spot price of 1 oz. of copper. The premium for each call option is 4.77, and the interest rate is 4.725%.

1. What is Acme Inc.s after hedge profit per gizmo if the price of copper one year from today is 35?

2. What would be the minimum after hedge profit Acme Inc. could make per gizmo?