The current spot price of crude oil is S= $50 per barrel. A US-Refinery called BigOil wants to fix a maximum price at $60 per barrel and a minimum price of $45 per barrel (ignoring any cost of options) that it will pay for 10,000 barrels of crude oil in one years time (T=1). At T, BigOil will purchase its crude oil (from Exxon) in the spot oil market. Appropriate call and put premia are C=$2 and P=$3. a). Explain how it might achieve the above outcome using options on crude oil. Explain the potential outcomes in one years time if ST =30 or ST = 50 or ST =70 by drawing the payoff diagram and presenting your results in a table of possible outcomes where: ST < Kp (= 45) ( Kp =) 45 < ST < 60 (= Kc ) ST > Kc =60 In your table include the cost of the (spot) oil, the payoff to the options, the cost of the options and hence the net purchase cost (effective cost) of the oil (at T), for BigOil. b). A zero-cost collar has C=P. Briefly explain the steps in constructing a zero-cost collar and any limitations such a strategy entails. Explain whether a zero-cost collar gives you something for nothing.