Assume today is May 1, 2022. Company WeDig is a copper mining company producing copper with plans to increase its size a

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Assume today is May 1, 2022. Company WeDig is a copper mining
company producing copper with plans to increase its size and
valuation over the next few years. The company has invested in
developing copper mines and commenced extracting copper and copper
production from its underground mines. The company is confident
that it will have an output of 50,000 tons of copper on 1 November
2022 and is willing to sell this output amount on that day.
The company’s revenue is subject to changes of the copper price.
As the market price of copper is quite volatile, the company is
considering using some strategies to manage its risk exposure.
Following further information is available:
• Profit margin is defined as (Revenue – Cost of Goods Sold) /
Revenue.
• The cost of mining one ton of copper is $7,500.
• The company has a target profit margin of 18%.
• The minimum acceptable profit margin below which the company
will have difficulties servicing its debt is 13%.
• The spot price of copper on 1 May 2022 is $9,820.
• The interest rate curve is flat and the risk-free interest
rate for all maturities is 1.5% (cont. comp.).
The company regularly transacts with the WeTradeDerivatives Bank
which is available as a counterparty of forward and option
contracts with copper as an underlying asset. Following option
contracts expiring on 1 Nov 2022 are available:
Based on this information and the knowledge you have obtained
while taking this Derivatives course, respond to the questions
below.
A. What is the profit margin of WeDig if the current spot price
is used? (1 mark)
B. What is the copper price at which WeDig achieves exactly its
target rate? (1 mark)
C. What is the critical copper price for WeDig? (1 mark)
D. What is the forward price for a contract expiring on 1 Nov
2022? (1 mark)