Big Construction Company operates in all US Western states and has contracts starting six months from today. The revenuesfrom contracts will be $540,000. An important determinant of the company's cost structure is the cost of fuel to power theirengines. They estimated the deliveries in six months will require 18,000 gallons of fuel. Currently, fuel sells for $4.75 pergallon. There is a concern that the price could increase significantly between now and in six months. Big was able to purchasecall options that would allow the company to purchase 18,000 gallons of fuel at $4.75 per gallon in six months. The cost of theoptions was $1,500, Six months after purchasing the options, the price of the fuel was $5.85 per gallon. What was the netbenefit to Big of using call options to hedge its fuel exposure?e $16,500.O $24.523.$12.256.O $28,125.

Call option: It is the option in which a right is given to the buyer of the option to buy the…

Answered: Big Construction Company operates in…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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