Consider the following prices for coffee options which were taken from WSJ. The units are dollars...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider the following prices for coffee options which were taken from WSJ. The units are dollars per pound of coffee. Strike 1.60 1.65 1.70 1.75 July Calls 0.1125 0.1000 0.0900 0.0760 July Puts 0.1635 0.2000 0.2410 0.2770 The futures price for July delivery is $1.549/lb. Ignore the time value of the money. Suppose I am a coffee producer (i.e., I sell coffee). Assume my break-even price for coffee is $1.55/lb. (a) If I want to lock in a selling price for coffee, what futures position should I take? What profit have I locked in? (Note: In this context, profit is the difference between the "all-in" price and the break-even price ($1.55/lb). For example, if you sell coffee at $1.70 after considering all involved costs, you make a profit of 1.70-1.55 or 80.15.) (b) I would like to protect myself against drops in the July price of coffee but still benefit if the July price of coffee rises. What option position should I take if I want a $1.65/lb floor-i.e., the option provides a hedge against price drops to $1.65 or lower on my selling price? What is the lowest "all-in" price (i.c. the net cost or revenue from the option plus the revenue from the coffee) that I will receive for the coffee? Draw the profit diagram with and without the floor. At what July spot price for coffee does the hedged position start to do better than the unhedged position? (c) How would I get a collar with a $1.60 floor and a $1.70 cap i.e., my profit is capped when the price of coffee is $1.70 or higher? Draw the profit diagram- for the collar. At what July spot price for coffee does the collar start to do better than the unhedged position? Consider the following prices for coffee options which were taken from WSJ. The units are dollars per pound of coffee. Strike 1.60 1.65 1.70 1.75 July Calls 0.1125 0.1000 0.0900 0.0760 July Puts 0.1635 0.2000 0.2410 0.2770 The futures price for July delivery is $1.549/lb. Ignore the time value of the money. Suppose I am a coffee producer (i.e., I sell coffee). Assume my break-even price for coffee is $1.55/lb. (a) If I want to lock in a selling price for coffee, what futures position should I take? What profit have I locked in? (Note: In this context, profit is the difference between the "all-in" price and the break-even price ($1.55/lb). For example, if you sell coffee at $1.70 after considering all involved costs, you make a profit of 1.70-1.55 or 80.15.) (b) I would like to protect myself against drops in the July price of coffee but still benefit if the July price of coffee rises. What option position should I take if I want a $1.65/lb floor-i.e., the option provides a hedge against price drops to $1.65 or lower on my selling price? What is the lowest "all-in" price (i.c. the net cost or revenue from the option plus the revenue from the coffee) that I will receive for the coffee? Draw the profit diagram with and without the floor. At what July spot price for coffee does the hedged position start to do better than the unhedged position? (c) How would I get a collar with a $1.60 floor and a $1.70 cap i.e., my profit is capped when the price of coffee is $1.70 or higher? Draw the profit diagram- for the collar. At what July spot price for coffee does the collar start to do better than the unhedged position?
Expert Answer:
Answer rating: 100% (QA)
a To lock in a selling price for coffee you should take a short futures position Since the futures price for July delivery is 1549lb you can lock in t... View the full answer
Related Book For
Introduction to Operations Research
ISBN: 978-1259162985
10th edition
Authors: Frederick S. Hillier, Gerald J. Lieberman
Posted Date:
Students also viewed these finance questions
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
Determine the magnitude of the projection of the moment cause by the force about the a a axis. OKAY, SO I DONT UNDERSTAND HOW TO GET "R" BECAUSE THE FORCE IS MEASURED ON AN AXIS AND NOT A POINT OR...
-
Triplett attempted to arrange a $2,850,000 loan through Meyer Rabin and his Consumers Investment Company (CIC). CIC issued a commitment letter conditioned on the payment of a $14,250 commitment fee...
-
Evaluate the derivatives of the following functions. (x) = tan -1 (e 4x )
-
Beng-Yu Woo, Xiaoming Li, and Vivian Hsiun created and patented an invention titled Full Duplex Single Chip Video Codec. At the time, Woo, Li, and Hsiun were employees of Infochips Systems, Inc....
-
1. Why had Sony been successful in the past (e.g., with the introduction of the Walkman, PlayStation, the CD, and the VAIO computer line)? 2. What was Mr. Ideis assessment of strategic alliances...
-
The buyer at Ajax Co. is responsible for maintaining inventory of a key component which is used in the firm's manufacturing process throughout the entire 52-week year. The annual demand is 12,000...
-
Locate the most recent committee reports associated with each of the following code sections (if any) using a tax service such as Checkpoint. Give the citation to the committee report, the Public Law...
-
Firms 1 and 2 are proposing to merge. They offer symmetrically differentiated products and have identical costs and , therefore, identical premerger prices. (Note that symmetrically differentiated...
-
What are the two components of interest rate risk?
-
What is the difference between using derivatives for hedging as opposed to speculation?
-
What is the difference between bidding regulation and antitrust regulation?
-
Why do businesses, mostly not-for-profit hospitals, hold long-term investment portfolios?
-
What are swaps?
-
1) 2) 3) Which of the following equations best summarizes photosynthesis? A) 6 CO2 + 6 H20 +6 02 C6H1206 B) 6 CO2 + 6H20 C6H1206+6 02 C) 6 CO2 + 6 02 C6H1206+ 6 H20 D) C6H1206+6 02 6 CO2 + 6H20 5)...
-
Refer to the situation described inBE 18-13, but assume a 2-for-1 stock split instead of the 5% stock dividend. Prepare the journal entry to record the stock split if it is to be effected in the form...
-
A department has one word-processing operator. Documents produced in the department are delivered for word processing according to a Poisson process with an expected interarrival time of 20 minutes....
-
Consider a problem with two decision variables, x1 and x2, which represent the levels of activities 1 and 2, respectively. For each variable, the permissible values are 0, 1, and 2, where the...
-
Read the referenced article that fully describes the OR study summarized in the application vignette presented in Sec. 18.7. Briefly describe how inventory theory was applied in this study. Then list...
-
Please reflect on and explain the role and usefulness of the concept of SD in relation to the protection of the environment.
-
Has the concept of SD achieved the balance between all three pillars: environmental protection; economic development; and social issues?
-
What, if any, is the normative content of the concept of SD?
Study smarter with the SolutionInn App