Question
Ore-Tech is an ore processing company that produces steal sheets. The companys pre-hedge profit is given by P(ST) = 30ST 10,250, where ST is the
Ore-Tech is an ore processing company that produces steal sheets. The companys pre-hedge profit is given by P(ST) = 30ST 10,250, where ST is the price of ore. The current spot price of ore is $425 per ton. The continuously compounded risk-free rate is 6%. To minimize its exposure in six months, the company is considering hedging with one of the following instruments: i) Sell 30 short forward contracts priced at 450 ii) Buy 30 long put options with strike of 410 and cost of 32.35
if the company hedges with 30 short forward contracts, the maximum profit is ____, the minimum profit is ____ and breakeven point(s) is(are) ____.
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