25) 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 riskon 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. Thefollowing wheat options offer a strike price of R50/per ton expiring in 1 month:O Call options on wheat are selling at a premium of R0.87 per ton.O Put options on wheat are selling for RO.72 per ton.(a) Given the information above, will you need need a call or a put option(b) 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."

Answered: 25) Your firm is one of the largest…

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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Learn Corp. (Ticker: LC), an education technology company, is considered to be one of the least risky companies in the education sector. Investors trade call options for Learn Corp., whose stock is currently trading at $18.00. Suppose you are interested in buying a call option with a strike price of $25.20 that expires in 6 months. (Assume that you get the option for free!) Based on speculations and probability analysis, you compute and collect the following information for your price analysis of the option: • For LC’s options, time until expiration (t) is taken as 0.50 year (6 months/12 months). • LC’s stock could go up by a factor of 1.50 (u). • LC’s stock could decline by a factor of 0.60 (d). At this time, LC’s stock price is , and if you exercised the option, your payoff would be . Therefore, if the option is out-of-the-money, you exercise the option. Calculate the ending stock price of Learn Corp. for both possible outcomes and the payoff in both…
Please help me stepwise sir thanks a lot. For both the alternative find and also tell which is best.
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You establish a straddle on Walmart using September call and put options with a strike price of $97. The call premium is $7.85 and the put premium is $8.60. Required: a. What is the most you can lose on this position? (Input the amount as positive value. Round your answer to 2 decimal places.) b. What will be your profit or loss if Walmart is selling for $98 in September? (Input the amount as positive value. Round your answer to 2 decimal places.) c-1. What is the Break-even price for lower bound? (Round your answer to 2 decimal places.) c-2. What is the Break-even price for upper bound? (Round your answer to 2 decimal places.)
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4
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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 RO.87 per ton. • Put options on wheat are selling for RO.72 per ton. • Given the information above, will you need need a call or a put option? • Ifeach 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. L
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