The 1-year forward price of copper is $ 1/lb. The 1-year continuously compounded interest rate is 6%. One-year option prices for copper are shown in the table below.
| Strike | Call | Put |
| 0.95 | 0.0649 | 0.0178 |
| 0.975 | 0.05 | 0.0265 |
| 1 | 0.0376 | 0.0376 |
| 1.025 | 0.0274 | 0.0509 |
| 1.034 | 0.0243 | 0.0563 |
| 1.05 | 0.0194 | 0.0665 |
Suppose CDE mines copper, with fixed costs of $ 0.50/lb and variable cost of $ 0.40/lb. If CDE does nothing to manage copper risk:
What is its profit 1 year from now, per pound of copper, if the copper price in 1 year is $ 0.80 $
?
What is its profit 1 year from now, per pound of copper, if the copper price in 1 year is $ 0.90 $
?
What is its profit 1 year from now, per pound of copper, if the copper price in 1 year is $ 1.00 $
?
What is its profit 1 year from now, per pound of copper, if the copper price in 1 year is $ 1.10 $
?
What is its profit 1 year from now, per pound of copper, if the copper price in 1 year is $ 1.20 $
?
If on the other hand CDE sells forward its expected copper production:
What is its profit 1 year from now, per pound of copper, if the copper price in 1 year is $ 0.80 $
?
What is its profit 1 year from now, per pound of copper, if the copper price in 1 year is $ 0.90 $
?
What is its profit 1 year from now, per pound of copper, if the copper price in 1 year is $ 1.00 $
?
What is its profit 1 year from now, per pound of copper, if the copper price in 1 year is $ 1.10 $
?
What is its profit 1 year from now, per pound of copper, if the copper price in 1 year is $ 1.20 $
?
You can earn partial credit on this problem.