Question

Suppose you purchase the May 2017 call option on corn futures with a strike price of $3.85. Assume you purchased the option at the last price if the day. Use Table 23.2 a. How much does your option cost per bushel of corn? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., 32.16161.) b. What is the total cost? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. Suppose the price of corn futures is $3.74 per bushel at expiration of the option contract. Each contract is for 5,000 bushels. What is your net profit or loss from this position? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Enter your answer as a positive value.) d. What is your net profit or loss if corn futures prices are $4.13 per bushel at expiration? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Enter your answer as a positive value.) per bushel a. Option cost Total cost Profit Loss

Answer 1

(A) : Cost per Bushel of Corn

Future Closing Price for May, 2017 for 100 Bushels of corn	377.25
Future Closing Price for May, 2017 for 1 Bushel of corn	3.7725

( B) : Total Cost

Total Cost = 3.7725 * 5000 ( Contract Size)= $ 18862.50

(C) : Net Profit/ Loss when Price at the expiry is $ 3.74

Call Option : Price below than Strike price at the expiry . Full amount is Loss.

Cost per Bushel = 3.7725

Each Contract size = 5000 Bushels

Net Loss : 3.7725*5000 = $ 18862.50

(D) : Net Profit/ Loss when Price at the expiry is $ 4.13

Purchase Cost on future position of May,2017	3.7725
Actual Price for 1 bushel of corn in May, 2017	4.13
Profit on 1 bushel of corn	0.3575
Profit on 1 Contract( 5000 bushels) of corn	0.3575*5000
	1787.5