ABC Corp. mines copper, with fixed costs of $0.60/lb and variable cost of $0.30/lb. The 1-year forward price of copper is $1.10/lb. The 1-year effective annual interest rate is 6.2%. 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
In your answers, consider copper prices in 1 year of $0.70, $0.80, $0.90, $1.00, $1.10, and $1.20.
If ABC Corp. does nothing to manage copper price risk, what is its profit one year from now, per pound of copper? If on the other hand ABC Corp. sells forward its expected copper production, what is its estimated profit one year from now? Construct a table for the two scenarios.
Assume the 1-year copper forward price were $0.90 instead of $1.10. If ABC Corp. were to sell forward its expected copper production, what is its estimated profit one year from now? What if the forward copper price is $0.60? Should ABC Corp. produce copper Construct tables for the scenarios.
Using table, compute estimated profit in 1 year if ABC Corp. buys a put option with a strike of $1.00.
Using table, compute estimated profit in 1 year if ABC Corp. sells a call option with a strike of $1.00.
Using table, compute estimated profit in 1 year if Corp. buys collars with the following strikes:
$0.95 for the put and $1.00 for the call
$0.975 for the put and $1.025 for the call
$1.05 for the put and $1.05 for the call