Return to the WTM case in the chapter where it is said that WTM could hedge its
Question:
Return to the WTM case in the chapter where it is said that WTM could hedge its exposure to the price risk of copper by purchasing a call option for $336 that would give it the right to buy one ton of copper in three months for $6,000. The spot price of a ton of copper is $6,000 and the risk-free rate is 5 percent.
a. What is the annual volatility of the price of copper?
b. What would be the call premium to buy a ton of copper in three months at $5,900? Explain the difference with the call premium to buy a ton of copper in three months at $6,000.
c. What should the supplier of copper do if it wants to hedge its price risk to deliver a ton of copper in three months at $6,000?
Step by Step Answer:
Finance For Executives Managing For Value Creation
ISBN: 9781473749245
6th Edition
Authors: Gabriel Hawawini, Claude Viallet