Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Big Metal Company produces Grade 1 copper. The company sells copper one year in advance and unfortunately, sales contracts for the next year have not
Big Metal Company produces Grade copper. The company sells copper one year in advance and unfortunately, sales contracts for the next year have not met expectations and the company is expecting to produce pounds of Grade copper that will be unsold held in inventory at the end of this year. You are the company's Treasurer and have been asked to hedge a possible future decrease in the price of copper in year.You have the following information: The oneyear forward price for copper is $ per pound Each forward contract on copper is for pounds of Grade copper The price of a oneyear, European, $strike call option $The riskfree continuously compounded interest rate is for all maturities.You want to use a put option to hedge your exposure since the company wants to capture price increases but cannot sell below $ per pound at a profit. Unfortunately, there are no copper put options available. But you remember from FIN that there is a way to create a synthetic $strike European put option to hedge your exposure.Compute the dollar cost of hedging the pounds of copper inventory using synthetic $strike European put options.HINT: Treat copper as a nondividend paying stock.
Needs to be done with the put call parity formula. CPSoK
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started