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Acme Inc. makes a component part called a gizmo used in iPhones. These parts are made of copper. Acme Inc. can sell each of the
- Acme Inc. makes a component part called a gizmo used in iPhones. These parts are made of copper. Acme Inc. can sell each of the gizmos to Apple for 100. Each gizmo uses 1 oz. of copper. All sales and production costs occur one year from today. Therefore, the pre-hedge profit per gizmo is given by: 100 X, where X is the price of 1 oz. of copper 1 year from now.
If Acme uses a one-year (long) forward contract per gizmo to hedge their exposure to price fluctuations, they can guarantee a profit of 35 per gizmo sold.
They prefer to keep some upside profit potential, so instead they will use a one-year (long) call option on copper with a strike price equal to the current spot price of 1 oz. of copper. The premium for each call option is 4.77, and the interest rate is 4.725%.
- What is Acme Inc.s after hedge profit per gizmo if the price of copper one year from today is 35?
- What would be the minimum after hedge profit Acme Inc. could make per gizmo?
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