Question

Problem 23-03 Futures Options Quotes (L04] Suppose you purchase the May 2017 call option on corn futures with a strike price of $3.60. Assume you purchased the option at the last price of 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 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.) c. Suppose the price of corn is $3.54 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.) d. What is your net profit or loss if corn futures prices are $3.97 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.) a. Option cost b. Total cost $ $ $ 0.26700 per bushel 1,335.00 1,335.00 c. Loss d. Profit

Answer 1

a) Option cost = 0.267 $

One need to look at last price of call option which is 0.267$ per bushel

b) Total cost = Contrct size x Cost per bushel

= 5000 bushel x 0.267

=1335.00$

c) Here call option is bought, call option gives it's holder right to buy underlying at strike price in future. Thus call option will be exercised only if market price is more than strike price

If market price = $3.54 per bushel , than call option will not be exercised

Thus loss = premium paid = $1335.00

d) If market price as at expirt = 3.97$ per bushel than option will be exercised

Profit = [(Market price-strike) x No of bushel] - Premium paid

= [(3.97-3.6) x 5000] - 1335

=1850-1335

=515.00$