A lithium battery manufacturer is wanting to hedge price risk associated the price of lithium. They want to protect against any unfavourable move in the lithium price and want to fully participate in any favourable movements. A ？？ lithium blank would suit the manufacturer. Alternatively, a blank blank lithium blank would result in a lower upfront premium cost to the manufacturer but provide similar protection. Alternatively, if the manufacturer desired a reduction in any hedging cost, and was willing to forgo some part of a favourable price move in the lithium price, but still remain protected against an unfavourable price move, they could establish a hedge comprised of a long blank lithium blank and a short blank lithium blank .
Question
A lithium battery manufacturer is wanting to hedge price risk associated the price of lithium. They want to protect against any unfavourable move in the lithium price and want to fully participate in any favourable movements.
A ？？ lithium blank would suit the manufacturer. Alternatively, a blank blank lithium blank would result in a lower upfront premium cost to the manufacturer but provide similar protection.
Alternatively, if the manufacturer desired a reduction in any hedging cost, and was willing to forgo some part of a favourable price move in the lithium price, but still remain protected against an unfavourable price move, they could establish a hedge comprised of a long blank lithium blank and a short blank lithium blank .
Solution
A long put option on lithium would suit the manufacturer. This would give them the right to sell lithium at a predetermined price, protecting them from any unfavorable price drops.
Alternatively, a long put spread on lithium would result in a lower upfront premium cost to the manufacturer but provide similar protection. This strategy involves buying a put option and selling another put option with a lower strike price.
If the manufacturer desired a reduction in any hedging cost, and was willing to forgo some part of a favorable price move in the lithium price, but still remain protected against an unfavorable price move, they could establish a hedge comprised of a long out-of-the-money put option on lithium and a short out-of-the-money call option on lithium. This strategy is known as a collar.
The long out-of-the-money put option would protect against significant price drops, while the short out-of-the-money call option would offset the cost of the put but would limit the benefit from favorable price increases.
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