Question
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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