Telco installs telecommunications equipment uses copper wire from a company called Wirco as an input. Wirco sells copper wire for the price of copper plus $5. For planning purposes, Telco assigns fixed revenue of $6.20 for each unit of wire it uses. The 1-year continuously compounded interest rate is 6%.
In your answers, at a minimum consider copper prices in 1 year of $0.80, $0.90, $1.00, $1.10, and $1.20.
One-year option prices for copper are shown in the table below.
Strike
0.95
1.00
Call
$0.0646
$0.0376
Put
$0.0178
$0.0376
a) Compute the estimated profit in 1 year if Telco sells a put option with strike of $0.95. Draw the profit diagram.
b) Compute the estimated profit in 1 year if Telco sells collars with the following strikes: $0.95 for the put and $1.00 for the call option. Draw the profit diagram.