Question
Suppose Acme Jewelers exposure to silver prices is 1 for 1: For every dollar increase in the price of silver, Acmes earnings decrease by one
Suppose Acme Jewelers exposure to silver prices is 1 for 1: For every dollar increase in the price of silver, Acmes earnings decrease by one dollar. Suppose, too, that silvers current spot price is $34/oz. and that a call option on silver with a $34 strike price is available at a premium of $2/oz.
a. Plot the change in Acmes earnings as the price of silver varies between $24/oz. and $44/oz. Put the price of silver on the x-axis and the change in Acmes earnings on the y-axis.
b. On the same graph, plot the profits (payoffs less premiums) on the silver call.
c. Finally, on the same graph, plot the change in Acmes earnings after it purchases the silver call against the price of silver.
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