Question

1. Suppose that you are long in the cash market and hedge with a put option. As the price of the commodity rises above the strike price what does the hedging position cost you?

2. An ethanol producer would purchase a put option to hedge against potential increases in the price of corn. True or False

3. What is the strike price of an option?

The intrinsic value of the option.

The price you paid to purchase the option.

The futures price at which the option can be exercised.

The price of the underlying futures contract when you purchase the option.

Answer 1

1. The premium of the option at purchase.

After the increase in price above strike price then the hedging position is the price to purchase to.pay for option.The strike price is the cost to enter into hedging position.

Hedging taking a futures position opposite to one's current cash/spot market position.

2. True

Purchasing ethanol would purchase anput option to hedge irrespective of potential increases in the price of corn by the seller.

Put option is a stock market device which gives the owner of a put the right, but not the obligation, to sell an asset (the underlying), at a specified price (the strike), by a predetermined date (the expiry or maturity) to a given party (the seller of the put).

3. C.)) the futures price at which an option can be exercised.

A strike price is the price at which a specific derivative contract can be exercised. The term is mostly used to describe stock and index options in which strike prices are fixed in the contract. For call options, the strike price is where the security can be bought (up to the expiration date); for put options, the strike price is the price at which shares can be sold.