PROBLEM # 1

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. Price of one unit of copper wire = $5 + Price of one pound of copper.

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 risk-free rate is 6%. One-year option prices for copper are shown in the table below:

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

Create the table and plot a graph of profit in excel for each case.

Compute estimated profit in 1 year if Telco buys a call option with a strike of $1.05.

Compute estimated profit in 1 year if Telco sells a put option with a strike of $0.95.

Compute estimated profit in 1 year if Telco sells collars (Buy the call option and sell the put option) with the following strikes: (Create a separate table and graph for each of the following)

$0.95 for the put and $1.00 for the call.

$0.975 for the put and $1.025 for the call.

$0.95 for the put and $0.95 for the call.

HINT:

In your table, at a minimum consider copper prices in 1 year starting at $0.60. Please note that in this problem Telco uses copper wire as a raw material. The price of copper wire in uncertain. The firm is hedging the cost of the copper wire. The price of copper wire depends on the price of copper.

In the case of part a) you will create a table in excel with the following columns.

Copper Price In 1 Year	Price of Copper Wire in 1 year	Payoff from Buying Copper wire	Payoff at Expiration for Buying CALL Option	TOTAl PAYOFF	Combined Profit on Hedged Position
0.60	=$5 + 0.60 = $5.60	This will be negative	?	?	?
0.61	=$5 + 0.61 = $5.61