CASE 2. Bike Tech is a company that produces bicycles. The company has determined that their profits per sheet of steal is given by P(ST) = 50,000 40ST where ST is the price of one sheet of steal six months from today. The continuously compounded risk-free rate is 5%. To minimize its exposure in six months, the company is considering to hedge with one of the following instruments: i) Sell 40 long forward contracts priced at 1200 ii) Buy 40 long call options with strike of 1300 and cost of 24.26

a) based on the profit model, does the company benefit from rising or declining ore prices?

b) does the company hold a long or short position?

c) at the market price of 1350, the profit of

the pre-hedged (unhedged) strategy is ____,

hedged with forward contracts is ____, and

hedged with put options is ____.

d) if the company hedges with 40 long forward contracts, the minimum profit is ____, the maximum profit is ____ and breakeven point(s) is(are) ____.

e) at the market price of 1250, the profit of

the pre-hedged (unhedged) strategy is ____,

hedged with forward contracts is ____, and

hedged with put options is ____.

f) if the company hedges with 40 long call options, the minimum profit is ____, the maximum profit is ____, and breakeven point(s) is(are) ____.