Consider the example of Auric.
a. Suppose that Auric insures against a price increase by purchasing a 440-strike call. Verify by drawing a profit diagram that simultaneously selling a 400 strike put will generate a collar. What is the cost of this collar to Auric?
b. Find the strike prices for a zero-cost collar (buy high-strike call, sell low-strike put) for which the strikes differ by $30.
€¢XYZ mines copper, with fixed costs of $0.50/lb and variable cost of $0.40/lb.
€¢Wirco produces wire. It buys copper and manufactures wire. One pound of copper can be used to produce one unit of wire, which sells for the price of copper plus $5. Fixed cost per unit is $3 and noncopper variable cost is $1.50.
€¢Telco installs telecommunications equipment and uses copper wire fromWirco as an input. For planning purposes, Telco assigns a fixed revenue of $6.20 for each unit of wire it uses.
The 1-year forward price of copper is $1/lb. The 1-year continuously compounded interest rate is 6%. One-year option prices for copper are shown in the table below.17

In your answers, at a minimum consider copper prices in 1 year of $0.80, $0.90, $1.00, $1.10, and $1.20.

Transcribed Image Text:

Strike Call 0.9500 $0.0649 $0.0178 0.9750 0.0500 0.0265 1.0000 0.0376 0.0376 1.0250 0.0274 0.0509 1.0340 0.0243 0.0563 1.0500 0.0194 0.0665 Put