Company x wants to sell 1,000 ounces of copper next month. The current copper price is 100
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Question:
Company x wants to sell 1,000 ounces of copper next month. The current copper price is 100 per ounce. Copper price is forecasted for the next month as below:
Scenarios | Probability | Copper price ( / ounce) |
Pessimistic | 0.3 | 80 |
Expected | 0.6 | 120 |
Optimistic | 0.1 | 150 |
Required: Calculate the expected revenues if Company x :
a. Does not arrange a hedge, just sells at the market price.
b. Arranges a one-month future contract to deliver the copper at 115 per ounce.
c.Buys a one-month put option to sell the copper at 130 per ounce, accepting to pay a premium 10 per ounce.
Which course of action should Lonton adopt?
Related Book For
Intermediate Accounting
ISBN: 978-0176509736
10th Canadian Edition, Volume 1
Authors: Donald Kieso, Jerry Weygandt, Terry Warfield, Nicola Young,
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