What is the total revenue of the company without the put option hedge and with the put option hedge? Without put option hedge With put option hedge £ £ A. 1,080,000 1,000,000 B. 960,000 1,030,000 C. 960,000 1,040,000 D. 1,040,000 1,030,000
An American oil company is concerned about short-term volatility in the price of oil. The CFO is concerned about the impact of this volatility on its revenue especially with the company having concluded arrangements to bring 1,000 tons to the market. The CFO wants to know what the revenue will be for this 1,000 tons on the assumption that
i. the firm remains unhedged and the oil price closes at £960 compared to
ii. the firm buys a 1-month put option at a cost of £10 a ton to sell oil for £1,040 a ton?
What is the total revenue of the company without the put option hedge and with the put option hedge?
Without put option hedge With put option hedge
£ £
| A. |
1,080,000 1,000,000 |
|
| B. |
960,000 1,030,000 |
|
| C. |
960,000 1,040,000 |
|
| D. |
1,040,000 1,030,000 |
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