Question

QUESTION 12 A call option on a stock, with time to maturity of 2 months and strike price of $25.67, is currently trading at a premium of $1.78 per share. If you buy options on 20,000 shares (200 contracts), and then at maturity the stock is trading at $22.76, what is your net profit from this position? QUESTION 13 A futures contract on copper traded at the Chicago Mercantile Exchange has a denomination of 25,000 pounds. Today you enter into a long futures position of 10 contracts on copper at $3.54 per pound, maturing in 6 months. If copper is trading at $3.49 at maturity, what is your net profit from this position?

Answer 1

(12) Call Option Strike Price = K = $ 25.67, Call Premium = C = $ 1.78, Number of Shares Bought = 20000, Number of Contracts Bought = 200, Stock Price Maturity = S = $ 22.76

Call Option Payoff Per Share = (Stock Price at Maturity - Call Option Strike Price) = 25.67 - 22.76 = $ 2.91

Net Profit = (Call Payoff Per Share - Call Premium Per Share) x Number of Shares Bought = (2.91 - 1.78) x 20000 = $ 22600

(13) Size of Each Contract = 25000 pounds, The investor takes a long position in 10 futures contract (buys 10 futures contract) at a forward price of $ 3.54 per pound, This implies that the investor will buy copper at the forward price upon contract maturity irrespective of the actual spot price of copper at that time.

Spot Price at Maturity = $ 3.49 per pound

Therefore, Net Profit = (3.49 - 3.54) x 25000 x 10 = - $ 12500 ( a negative sign indicates a net loss which occurs because the investor is obliged to buy copper at the pre-committed futures price even though the spot price is lower at $ 3.49)