ame Insert Draw Layout Mailings Review Times New 12 Aa Aid Song ng Pane UOB Chapter 4 Problem Assignment Design References View Tell me + A A A ! Atcode Mobile bt ascinate B TUX APA- .. heiding r 4 Introduction to RISK Management - Chapter Problem Assignment Complete and submit the following problems. Be sure to include your calculations and Excel file in your submission For the following problems consider the following three firms: XYZ mines copper, with fixed costs of $0.50/1b, and variable cost of $0.40/1b. 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 from Wirco 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 Strike Call Put 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 In your answers, at a minimum consider copper prices in 1 year of S0.80, $0.90, $1.00, $1.10, and $1.20. 19 word Engin United States Chapter 4 Problem Assignment View Tell me References Mailings Review Aa v A AaBbccdee AaBbCcDdEe AaBbCcDc AaBb CcDdEt AaBb Normal No Spacing Heading 1 Heading 2 Title 3. Compute estimated profit in 1 year if XYZ buys a put option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case. a. 4. Compute estimated profit in 1 year if XYZ buys collars with the following strikes: a. $0.95 for the put and $1.00 for the call. b. $0.975 for the put and $1.025 for the call. c. $1.05 for the put and $1.05 for the call. d. Draw a graph of profit in each case. 321 AaBbccide AaBbCcode A Av AaBbCcDc AaBbccdet Aa Bbc Heading 1 Normal No Spacing Heading 2 Title 5. If Telco does nothing to manage copper price risk, what is its profit 1 year from now, per pound of copper that it buys? If it hedges the price of wire by buying copper forward, what is its estimated profit 1 year from now? Construct graphs illustrating both unhedged and hedged profit. 6. Compute estimated profit in 1 year if Telco buys a call option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case. Compute estimated profit in 1 year if Telco sells a put option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case. 7. Page 2 of 3 ame Insert Draw Layout Mailings Review Times New 12 Aa Aid Song ng Pane UOB Chapter 4 Problem Assignment Design References View Tell me + A A A ! Atcode Mobile bt ascinate B TUX APA- .. heiding r 4 Introduction to RISK Management - Chapter Problem Assignment Complete and submit the following problems. Be sure to include your calculations and Excel file in your submission For the following problems consider the following three firms: XYZ mines copper, with fixed costs of $0.50/1b, and variable cost of $0.40/1b. 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 from Wirco 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 Strike Call Put 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 In your answers, at a minimum consider copper prices in 1 year of S0.80, $0.90, $1.00, $1.10, and $1.20. 19 word Engin United States Chapter 4 Problem Assignment View Tell me References Mailings Review Aa v A AaBbccdee AaBbCcDdEe AaBbCcDc AaBb CcDdEt AaBb Normal No Spacing Heading 1 Heading 2 Title 3. Compute estimated profit in 1 year if XYZ buys a put option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case. a. 4. Compute estimated profit in 1 year if XYZ buys collars with the following strikes: a. $0.95 for the put and $1.00 for the call. b. $0.975 for the put and $1.025 for the call. c. $1.05 for the put and $1.05 for the call. d. Draw a graph of profit in each case. 321 AaBbccide AaBbCcode A Av AaBbCcDc AaBbccdet Aa Bbc Heading 1 Normal No Spacing Heading 2 Title 5. If Telco does nothing to manage copper price risk, what is its profit 1 year from now, per pound of copper that it buys? If it hedges the price of wire by buying copper forward, what is its estimated profit 1 year from now? Construct graphs illustrating both unhedged and hedged profit. 6. Compute estimated profit in 1 year if Telco buys a call option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case. Compute estimated profit in 1 year if Telco sells a put option with a strike of $0.95, $1.00, or $1.05. Draw a graph of profit in each case. 7. Page 2 of 3
