Assume that you will need 1,000 Barrels of oil (you are a finance manager at Delta Airlines), one month from today. The current price of oil is $45.0 / barrel. You expect that the future spot price/barrel could be either, $42.0, $46.0, or $50.0 with equal probability. The 3-month forward rate for oil is $47.0 / Barrel. The price of an at-the-money Call option on oil is $2.50 per barrel. The price of an at-the-money Put option on oil is $2.00 per barrel. Compute the Net Cost of oil for Delta under each of the following scenarios, by copying and pasting the table and filling in the relevant cells:

a. Net Final Revenue /barrel of oil if you did not hedge

b. Net Final Revenue /barrel of oil if you used a Forward contract to hedge

c. Net Final Revenue /barrel of oil if you used Call options to hedge

d. Net Final Revenue /barrel of oil if you used Put options to hedge

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a) No Hedge: Net Cost of Oil b) Using Forward Contract (Specify one) Long or Short: (i) Cost of Oil (ii) Profit /Loss on Forward (iiiiii) Net Cost (with Forward hedging) c) Using Call options Contract (Specify) Long or Short: (i) Cost of Oil (ii) Profit /Loss on Options (iii=i+ ii) Net Cost (with Call Options hedging) d) Using Put options Contract (Specify) Long or Short: (i) Cost of Oil (ii) Profit /Loss on Options (iii=i+ ii) Net Cost (with Put Options hedging) Strategy Spot Price in 3 months = $42.0 Spot Price in 3 months = $46.0 Spot Price in 3 months = $50.0 a) No Hedge: Net Cost of Oil b) Using Forward Contract (Specify one) Long or Short: (i) Cost of Oil (ii) Profit /Loss on Forward (iiiiii) Net Cost (with Forward hedging) c) Using Call options Contract (Specify) Long or Short: (i) Cost of Oil (ii) Profit /Loss on Options (iii=i+ ii) Net Cost (with Call Options hedging) d) Using Put options Contract (Specify) Long or Short: (i) Cost of Oil (ii) Profit /Loss on Options (iii=i+ ii) Net Cost (with Put Options hedging) Strategy Spot Price in 3 months = $42.0 Spot Price in 3 months = $46.0 Spot Price in 3 months = $50.0

Answer rating: 100% (QA)

SOLUTION HERE WE HAVE USED FORWARD STRIKE PRICE IS 47 CALL STR... View the full answer