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Pinder Ltd is a company specialising in the brewing of a style of beer called IPA. A key
ingredient in IPA is a type of hops called Simcoe Hops. Simcoe Hops is currently traded in the
market for $20 per kilo. It is July 2018 and you have been engaged by Pinder Ltd to provide them with advice on how
they might manage their exposure to the cost of hops when they next need to buy them in
November 2018. The Chief Financial Officer (CFO) of Pinder Ltd tells you that hops prices are notoriously
volatile (see here for example: goo.g l/3Muuvd) and she would like to understand how the use
of options might assist her company in managing that risk. (a) Advise the CFO what style of option Pinder Ltd should consider purchasing (i .e. a put
or call) and why that is the case. (b) Show — using a payoff diagram — the payoffs from the style of option selected in part
(a) — assuming that that option had an exercise price of $22 per kilo. Also include the
payoff from an unhedged position (no need to use Excel here — just label turning points
and intercepts (if any)). (c) Now show — using a payoff diagram — the payoffs for Pinder Ltd in terms of the cost
they face in September (per kilo) for their hops if they hedge using the option described
in (a) and (b). (d) Explain the circumstances — if any — under which Pinder Ltd will be worse off (overall)
if they hedge using the options described above as compared with not hedging at all.
Demonstrate this graphically [for the sake of the illustration — assume that the option
described above cost $1 to buy].

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