Question

Big Construction Company operates in all US Western states and has contracts starting six months from today. The revenue from contracts will be $540,000. An important determinant of the company's cost structure is the cost of fuel to power their engines. They estimated the deliveries in six months will require 18,000 gallons of fuel. Currently, fuel sells for $4.75 per gallon. There is a concern that the price could increase significantly between now and in six months. Big was able to purchase call options that would allow the company to purchase 18,000 gallons of fuel at $4.75 per gallon in six months. The cost of the options was $1,500. Six months after purchasing the options, the price of the fuel was $5.85 per gallon. What was the net benefit to Big of using call options to hedge its fuel exposure? $24.523. O $12.256. O $28,125. o $16.500.

Answer 1

1O tal Revennues Tor contracts = $S40,000 To tal Fel rquired For contract six months (&,000 aions. cost oP Fuel per qalians $ 4-7S durtng TO tol cast of Fue n star 18,000 x 4.5 $8S,S00 during Six months becawe of Fue inereases CoSt to get the $1500 Option purthaued the For #4.75 Por Six Months. Fuet Totai fuel cost ith Gptions 85,500 4IS00 $87000 -- oPtions he ad In case not purctoued the Fuel for F5.85 per the lons to purchase 13ia purctoued for s-85 TOtal Fue1 cast for 18000 x S-85 0 5300 .O

benft ttot the To tal get becaue buying options is IOS3 00 O0DE8 18300 Cprofit for B