Question

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.g. 32.16. Enter your answer as a positive value.) Profit Hints References eBook & Resources

Answer 1

1)

Table has all prices in CENTS.

Therefore, we need to see the strike price of 500 cents which has last trade price of 12.6 cents

Therefore, Call Option Price of Strike Price of $5 per Bushel = 12.6 cents = $0.126

2)

Total Cost of Position = Option Price per bushel*Contract Size = $0.126*5000 = $630

3)

If Spot Price at expiry is $4.94, Opton is OUT OF MONEY. Hence, it will be lapsed.

Total Loss = Premium Paid = $630

4)

If Spot Price at expiry is $5.23, Option is IN THE MONEY. Hence, it will be exercised.

Total Profit = [(Spot at expiry-Strike Price)*Contract Size]-Premium Paid ] [(5.23-5)*5000]-630 = 1150-630 = $520