An oil production company extracts and ships 4,000 barrels of oil every day. Each barrel of...

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An oil production company extracts and ships 4,000 barrels of oil every day. Each barrel of oil costs $50 and takes one month to reach the market. Its profit model is expressed by (ST) = 4000.ST - 200,000 The interest rate is 6%. Having the following information, how can you hedge the volatility using derivative contracts? Describe your approach. Sketch the portfolio profit vs. oil price. What is the breakeven price(s) for the hedged portfolio? What are the maximum and minimum profit (loss) the portfolio can produce? r = 6%; T= 1m = 1 12' Forward: F 1 = 95 0,12 Put option: K= 90, P(90, 1) = 4.975 Call Option: K = 100, C(100, 12) = = 5.345 An oil production company extracts and ships 4,000 barrels of oil every day. Each barrel of oil costs $50 and takes one month to reach the market. Its profit model is expressed by (ST) = 4000.ST - 200,000 The interest rate is 6%. Having the following information, how can you hedge the volatility using derivative contracts? Describe your approach. Sketch the portfolio profit vs. oil price. What is the breakeven price(s) for the hedged portfolio? What are the maximum and minimum profit (loss) the portfolio can produce? r = 6%; T= 1m = 1 12' Forward: F 1 = 95 0,12 Put option: K= 90, P(90, 1) = 4.975 Call Option: K = 100, C(100, 12) = = 5.345

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To hedge the volatility using derivative contracts the company can use a combination of forward cont... View the full answer