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For problems 1 to 5, consider two rms, XYZ and Teleco. Firm XYZ

mines copper, with xed costs of $0:50=lb and

variable costs of $0:40=lb.

Teleco sells the telecommunications equipment and uses copper wire as an

input. Suppose Teleco earns a xed revenue of $6:20 for each unit of wire it

uses. The wire price is the price of copper/lb plus $5. The 1-year forward

price of copper is $1=lb. The 1-year interest rate is 6%. The 1-year option

prices for copper are

C(0:9500) = 0:0649; C(0:9750) = 0:0500; C(1:0000) = 0:0376;

C(1:0250) = 0:0274; C(1:0500) = 0:0194;

P(0:9500) = 0:0178; P(0:9750) = 0:0265; P(1:0000) = 0:0376;

P(1:0250) = 0:0509; P(1:0500) = 0:0665


1. Suppose XYZ buys a put option with a strike of $0:95, $1:00, or $1:05.

Draw a graph of the hedged prot in each case.

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