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Question 2 (20 marks) Suppose an air-cargo carrier needs to consume substantial fuel for its operation. Tim, its finance manager, is concerned that the rising

Question 2 (20 marks)

Suppose an air-cargo carrier needs to consume substantial fuel for its operation. Tim, its finance manager, is concerned that the rising prices of oil will increase the operating costs and eat into the companys profit. He wishes to hedge against that risk by some derivative products.

Complete the table below for a long position in a call option with an exercise price of $70 and a premium of $4 per barrel. Ignore the time differential between the initial option expenses or receipt and the terminal payoff.

Expiration date oil price

Expiration date option payoff

Initial option premium

Combined terminal position value

40

50

60

70

80

90

100

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