Question

Solve B

b) Call Option: March corn (5000 bushels). March Futures = $3.49 bushel. Option Strike Price: $3.40 per bushel. Option Premium: 18 cents per bushel.

Answer 1

The solution is as follows:

Price at emiur - Paid" | Sellal Payoff for Long Call Position 0 D = A +B+C Solution to (b): You buy a Call option with Stoke Price of $3140 at a premium of $0.18. A - call option gives the buyer the right, but not the obligation to buy the underlying I at the strike Price Expiry A l 3 -0.18 - 3 3 - -0.18 1 34 -0.18 -3.3.4 -0.18 3.2 -0.18 -3,2 3.2 -0.18 3.3 -0.18 -3.3 3.3 -0.18 3.4 -0.18 -3.4 3.4 -0.18 3.5 -0.18 -3.4 3.5 -0.08 36 -0.18 -3.4 3.6 -0.02 3.7 -0.18 -3.4 3.1 0.12 3.8 -0.18 - 3.4 3.8 0.22

[ Breakeven price for Long Call option - Strike Price + Poemium paid ie. Sy tr . 3.40 7.18 -$3.58 Payoff for Long call option. Profit / Loss → 0.30. 0.200 0.10 BEP 3 3.1 3 3.1 3.2 3.3 3.4 2,593.6 3.7 3.8 --0:10. -0.20. -0:30 closing Price @ Expiry The contract Value for a long Call option with lot Size of 5000 bushels and Strike Price of $3.40 perbushel is

3.40 X 5000 =$19000 The maximum loss for such an option buyer would be equal to 0.18 85000 = $900 I Now, in case of futures contract, long as well as short position has unlimited profit or loss potential. This results into linear payoffs for futures contract. Payoff for Buyer of futures: Long futures. Long Futures at $3.49 Market price at Expiry Long futurer Pay off. 3-3.4 -0.49 3.1 3.1-3.49=-0.39 3.2 3.2-3.49 -0.29 33 3.3 -3.49--0.19 3.4 - 3.49=-0.09 3.5-3.49 = 0ood ó có Jho

3.6 3.7 3.6-3.49 0.11 3.7 - 3.49 = 0.21 3.8 - 3.49-0-31 308 Long Futures royoff → Profit I Loss <3 3 3:1 3:2 2.3 2.4 3.5 3.6 3.738 0.10. -0.20 -0.30! -0.400 -0.50. Cement Market hoice @ Expiry →