A B C D E F G H J K L M N O P You are the head of ski operations at Copper Mountain ski resort in Colorado. You have received a NOAA long-range weather report showing a milder than average winter ski season between November -March. Your annual ski lift revenue in a normal season is $600 million. You are looking to protect your revenues from adverse weather and want to use CME CDD weather options to do so. You can use either CDD put or call options with the profit for each indicated below: Purchased Put CDD Option MAX(0, K-S) - p 7 Purchased Call CDD Option MAX(0, S-K) - C where S = the spot price and K = the strike price for the contracts and p and c are the put and call premiums, respectively. 2 You also know that for every 1 unit change in CDD causes revenue to decline by $.0434 The strike price of the CDD put or call contract for the Nov-Mar contract is 1,300 and each contract costs $100/contract The tick size to assume for this question is $20 The spot price for the contract is 1,600 6 A. What type of option should you use; puts or calls and why? A diagram of the unhedged and hedge positions should be shown and labeled clearly 3 B. How many contracts are required to fully offset your risk to revenue declining? 9 ) R S T B C D E F G H K L 16 A. Wnat type of option shoula you use; puts or calls and wny? A diagram of the unneged and nege positions snoula de snown and labeled clearly 17 18 B. How many contracts are required to fully offset your risk to revenue declining? 19 20 21 22 22 23 24 25 26 27 28 29 30 31 32 9. What is is the hedge profit before and after consideration of premiums? 33 34 35 36 37 38 39 10 Before After Premium M N 0 P Q R S T