A firm will purchase 100,000 barrels of oil in 4 months, and is concerned about...
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A firm will purchase 100,000 barrels of oil in 4 months, and is concerned about the uncertainty in the price it will have to pay. It doesnt want to hedge its exposure using oil futures contracts, because it believes oil prices could fall, and it wants to benefit if there is a decrease in oil prices. But the firms competitive position will be severely weakened if oil prices happen to rise. Please show how the firm can use a call option on oil to provide protection against the impact of oil price increases, while preserving the ability to benefit from price decreases. Specifically, what is firms position in a call option with strike price $30? Please explain. What is the firms net expenditures per barrel of oil after it uses the call option? Please show the payoff table and graph the payoff of such a protective call position (i.e., graph net expenditures per barrel of oil as a function of oil prices). (net expenditures per barrel of oil is the same as payoff).
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