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 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: 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."
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 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: 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."
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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Question
Transcribed Image Text: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 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:
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."
Expert Solution
Step 1
In a call option, the buyer gets the right to exercise the option written at a predefined price and time.
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Solved in 2 steps
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