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Telco installs telecommunications equipment uses copper wire from a company called Wirco as an input. Wirco sells copper wire for the price of copper plus $5. For planning purposes, Telco assigns fixed revenue of $6.20 for each unit of wire it uses. The 1-year forward price of copper is $1/lb. The 1-year continuously compounded interest rate is 6%. In your answers, at a minimum consider copper prices in 1 year of $0.80, $0.90, $1.00, $1.10, and $1.20.
One-year option prices for copper are shown in the table below.
Strike Call Put
0.95 $0.0649 $0.0178
1.00 $ 0.0376 $0.0376
a) Compute the estimated profit in 1 year if Telco sells a put option with strike of $0.95. Draw the profit diagram.
b) Compute the estimated profit in 1 year if Telco sells collars with the following strikes: $0.95 for the put and $1.00 for the call option.
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