Question

3. value: 10.00 points Suppose you purchase the June 2014 call option on corn futures with a strike price of $5.00 at the last price of the day. Use Table 23.2 How much does your option cost per bushel of corn? (Do not round intermediate calculations. Round your answer to 5 decimal places, e.g. 32.16161.) Option cost per bushel What is the total cost of your position? Assume each contract is for 5,000 bushels. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 32.16.) Total cost Suppose the price of corn is $4.94 per bushel at expiration of the option contract. 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.) Loss What is your net profit or loss if corn futures prices are $5.23 per bushel at expiration? (Do not round intermediate calculations and round your answer to 2 decimal places, e... 32.16. Enter your answer as a positive value.) Profit Hints References eBook & Resources Hint #1

Answer 1

The option premium is quoted in Cents per bushel

For the strike price of $5 (500.0 cents), the Last price is 12.6 cents or $0.126 per bushel

The call option costs $0.126 per bushel of corn

If One option contract is for 5000 bushels, total cost of position = $0.126*5000 =$630.00

If price of corn is $4.94 per bushel at the expiration of option contract, the call option will become worthless and the holder will have a loss equal to the total premium paid

Loss =$630.00  

If price of corn is $5.23 per bushel at the expiration of option contract, the call option will be exercised and the profit from the position = profit from exercise - Net cost of options

= ($5.23-$5.00)*5000 -$630

Profit  =$520.00