Your firm is one of the largest bakery’s in the area. As part of your risk management process, you are considering using options to hedge the price risk on your biggest input – wheat. You have determined that a price of R52/per ton would allow for you to keep the same profit margin as last year. The following wheat options offer a strike price of R50/per ton expiring in 1 month: Call options on wheat are selling at a premium of R0.87 per ton. Put options on wheat are selling for R0.72 per ton. If each option is for 100 tons, and you require 1000 tons of wheat, demonstrate the outcome if, at expiry, the spot price of wheat is (i) R40 per ton and (ii) R60 per ton. Number of contracts= Total Premium paid= Stock Price ST = R 40 ST = R60 Cost for 1000 tons= Payoff= Total profit/loss= Effective rate per ton=
Your firm is one of the largest bakery’s in the area. As part of your risk management process, you are considering using options to hedge the price risk on your biggest input – wheat. You have determined that a price of R52/per ton would allow for you to keep the same profit margin as last year. The following wheat options offer a strike price of R50/per ton expiring in 1 month: Call options on wheat are selling at a premium of R0.87 per ton. Put options on wheat are selling for R0.72 per ton. If each option is for 100 tons, and you require 1000 tons of wheat, demonstrate the outcome if, at expiry, the spot price of wheat is (i) R40 per ton and (ii) R60 per ton. Number of contracts= Total Premium paid= Stock Price ST = R 40 ST = R60 Cost for 1000 tons= Payoff= Total profit/loss= Effective rate per ton=
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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- Your firm is one of the largest bakery’s in the area. As part of your risk management process, you are considering using options to hedge the price risk on your biggest input – wheat. You have determined that a price of R52/per ton would allow for you to keep the same profit margin as last year. The following wheat options offer a strike price of R50/per ton expiring in 1 month:
- Call options on wheat are selling at a premium of R0.87 per ton.
- Put options on wheat are selling for R0.72 per ton.
If each option is for 100 tons, and you require 1000 tons of wheat, demonstrate the outcome if, at expiry, the spot price of wheat is (i) R40 per ton and (ii) R60 per ton.
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Number of contracts= |
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Total Premium paid= |
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Stock Price |
ST = R 40 |
ST = R60 |
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Cost for 1000 tons= |
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Payoff= |
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Total |
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Effective rate per ton= |
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