• Acme Inc. makes widgets that include 1 oz. of platinum. The current spot price of platinum is 1,440/oz. One widget will sell for 2,000 and has non platinum costs of 500 to produce (So, their profit function is P(x)= 2,000x – 500). The risk free rate is 4%. The widgets are to be made and sold at time 1. Calculate the unhedged and hedged profits at the end of one year if Acme sells all 100 widgets that they produce given the price of platinum one year from today is (a) 1,375/oz. (b) 1,475/oz. (c) 1,575/oz.
• For hedging with forwards use one year contracts with forward price of 1,450/oz.
• For hedging with options use one year call options with a strike price of 1,425/oz. with a premium of 30.00/oz.