Hedging with Calls. A large dental lab plans to purchase 1 000 ounces of gold in 1 month. Assume

QUESTION

Hedging with Calls.A large dental lab plans to purchase 1,000 ounces of gold in 1 month. Assume again that gold prices can be $1,000, $1,200, or $1,400 an ounce.(LO2)What will total expenses be if the firm purchases call options on 1,000 ounces of gold with an exercise price of $1,080 an ounce? The options cost $15 per ounce.What will total expenses be if the firm purchases call options on 1,000 ounces of gold with an exercise price of $1,040 an ounce? These options cost $25 per ounce.
Given, Gold 1000 ounces Price per ounce 1000 / 1200 / 1400 Total cost of purchase Answer 1 Call option strike rice 1080 Price Of option $15 Number of options purchased 1000 Total Cost of option premium 1000 * 15 Total Cost of option premium 15,000.00 Statement of total expense Particulars Price per ounce-1000 Price per ounce-1200 Price per ounce-1400 Total cost of purchase 1000 * 1000 1200 * 1000 1400 * 1000 1,000,000.00 1,200,000.00 1,400,000.00 Add :Total Cost Of Premium 15,000.00 15,000.00 15,000.00 Less : Income from pay off Price is less than exercise 120*1000 =120000 320*1000 =320000 (price 1080) * 1000 price so option lapsed Total Expense 1,015,000.00 1,095,000.00 1,095,000.00 Answer 2 Call option strike rice 1040 Price Of option $25 Number of options purchased

00 Total Cost of option premium 1000 * 25 Total Cost of option premium 25,000.00 Statement of total expense Particulars Price per ounce-1000 Price per ounce-1200 Price per ounce-1400 Total cost of purchase 1000 * 1000 1200 * 1000 1400 * 1000 1,000,000.00 1,200,000.00 1,400,000.00 Add :Total Cost Of Premium 25,000.00 25,000.00 25,000.00 Less : Income from pay off Price is less than exercise 160*1000 =160000 360*1000 =360000 (price 1040) * 1000 price so option lapsed Total Expense 1,025,000.00 1,065,000.00 1,065,000.00

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