1.(4 marks) A Bank has written European put options on silver futures. The options and futures contracts expire in 9 months. The futures price is $14.97 per ounce, the exercise price of the option is $15 per ounce, the risk-free interest rate is 4% per year (CCR), and the market price of put options are $1.15 per ounce. How many silver futures contracts are needed (per option) to track the options based on delta hedging?
- (4 marks) A canola farmer wants to hedge her risk associated with next years harvest, at which time she expects to harvest 200 tonnes of canola and sell it six months from now. The current spot price of canola is $499.50 per tonne and the 6-month forward price is 498.00 per tonne. The return volatility of canola is 20% per year and the risk-free rate is 4% per year (EAR). She assumes that the volatility of her harvest is 50 tonnes and the correlation between quantity harvested and canola price is —0.4, the canola price is uncorrelated with the market portfolio, and the risk-free rate is constant. How should she best hedge her risk using 6-month forward contracts?
- Canadian Petroleum has reserves of 200,000 barrels of oil that can be extracted at the end of the year. The current spot price of crude oil is $50 per barrel and CP’s cost of extraction is $20 per barrel. The risk-free rate is 4% per year (EAR), the net convenience yield for oil is assumed to be 2% per year (EAR), and the volatility for oil is 40% per year. CP has fixed costs of $4 million next year. (Assume all revenues and costs occur at the end of each year.) a. (4 marks) If CP hedges its fixed costs using forward contracts, how much free cash would it have next year if the oil price turns out to be $75 per barrel?
- (4 marks) If CP hedged its fixed costs using put options with a strike price of $45 izicEtigvegetiWinittlymg cash would it have next year if the oil price turns out to be $75 per barrel?
