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Question
Neunlay Inc., is a manufacturer of residential air conditioning equipment. Air conditioning equipment requires a lot of copper. In six months the company will purchase its copper supply for the next two years. Management is very concerned about the volatility of copper prices. Assume the risk-free rate of interest is 0 percent. Which of the following transactions will ensure the company does not have to pay more than $6,100 per ton of copper six months from now?A) The company purchases a put option for the necessary amount of copper with a strike price of $6,000 per ton, a premium of $100 per ton, and an expiration date six months from now.
B) The company purchases a call option for the necessary amount of copper with a strike price of $6,000 per ton, a premium of $100 per ton, and an expiration date six months from now.
C) The company sells a put option for the necessary amount of copper with a strike price of $6,000 per ton, a premium of $100 per ton and an expiration date six months from now.
D) The company sells a call option for the necessary amount of copper with a strike price of $6,000 per ton, a premium of $100 per ton, and an expiration date six months from now.
Answer
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