Question

In: Finance

3. Options contracts for corn are listed below. A single option contract is for 5,000 bushels,...

3. Options contracts for corn are listed below. A single option contract is for 5,000 bushels, but prices are quoted per bushel. For example, if someone wanted to purchase a December 2018 put option with a strike price of $3.60, then the premium would be $400 (= $0.08 x 5,000 bushels). The maturity dates are the same as the futures contracts.

Expiration Strike Call Put
DEC 2018 $3.60 $0.41 $0.08
DEC 2018 $3.70 $0.35 $0.12
DEC 2018 $3.80 $0.30 $0.17
DEC 2018 $3.90 $0.26 $0.22
DEC 2018 $4.00 $0.22 $0.29
DEC 2018 $4.10 $0.19 $0.36
DEC 2018 $4.20 $0.16 $0.43

Firm A needs to purchase 10,000 bushels of corn in December 14, 2018. The current price per bushel of corn is $3.60. Assume the firm cannot pass on any increased costs due to changes in price to their customers.

Suppose Firm A decides to purchase option contracts to protect itself from corn prices above $3.90 per bushel.

(a) What will be the total premium Firm A has to pay for these contract(s)?

(b) What would be the total payoff if the price of corn at maturity is $3.70?

(c) What would be the total payoff if the price of corn at maturity is $4.00?

(d) What would be the total payoff if the price of corn at maturity is $4.20?

Solutions

Expert Solution

Call option gives the holder the right to purchase a particular amount(lot size) of underlying stock at a strike price on the expiration date.

Put option gives the holder the right to sell a particular amount(lot size) of underlying stock at a strike price on the expiration date.

In this case firm A would buy 2 lots(10,000 bushels) of Call options of strike $3.9 with premium of $0.26 of december maturity.

A) Total premium = premium * number of bushels =0.26 * 10000 = $2600

B) At maturity spot price: $3.7 Strike price= $3.9

Payoff = (spot price - strike price) * 10000 bushels = ($3.7 - $3.9) * 10000 = - $2000

Total payoff = Payoff - Premium = -$2000 - $2600 = -$4600

C) At maturity spot price: $4 Strike price= $3.9

Payoff = (spot price - strike price) * 10000 bushels = ($4.0 - $3.9) * 10000 = $1000

Total payoff = Payoff - Premium = $1000 - $2600 = -$1600

B) At maturity spot price: $4.2 Strike price= $3.9

Payoff = (spot price - strike price) * 10000 bushels = ($4.2 - $3.9) * 10000 = $3000

Total payoff = Payoff - Premium = $3000 - $2600 = $400


Related Solutions

A corn futures contract is 5,000 bushels. If you buy a contract of corn at 356...
A corn futures contract is 5,000 bushels. If you buy a contract of corn at 356 and sell it for 336, what will your profit or loss be? (Assume you don’t pay any commissions or fees for the entry and exit transactions.) 10 dollars loss 1,000 dollars loss 10 dollars profit 1,000 dollars profit
Use the following corn futures quotes: Corn 5,000 bushels Contract Month Open High Low Settle Chg...
Use the following corn futures quotes: Corn 5,000 bushels Contract Month Open High Low Settle Chg Open Int Mar 455.125 457.000 451.750 452.000 −2.750 597,913 May 467.000 468.000 463.000 463.250 −2.750 137,547 July 477.000 477.500 472.500 473.000 −2.000 153,164 Sep 475.000 475.500 471.750 472.250 −2.000 29,258 Suppose you buy 27 of the September corn futures contracts at the last price of the day. One month from now, the futures price of this contract is 464.125, and you close out your...
Use the following corn futures quotes: Corn 5,000 bushels Contract Month Open High Low Settle Chg...
Use the following corn futures quotes: Corn 5,000 bushels Contract Month Open High Low Settle Chg Open Int Mar 455.125 457.000 451.750 452.000 −2.750 597,913 May 467.000 468.000 463.000 463.250 −2.750 137,547 July 477.000 477.500 472.500 473.000 −2.000 153,164 Sep 475.000 475.500 471.750 472.250 −2.000 29,258 Suppose you buy 16 of the September corn futures contracts at the last price of the day. One month from now, the futures price of this contract is 462.25, and you close out your...
Use the following corn futures quotes: Corn 5,000 bushels Contract Month Open High Low Settle Chg...
Use the following corn futures quotes: Corn 5,000 bushels Contract Month Open High Low Settle Chg Open Int Mar 455.125 457.000 451.750 452.000 −2.750 597,913 May 467.000 468.000 463.000 463.250 −2.750 137,547 July 477.000 477.500 472.500 473.000 −2.000 153,164 Sep 475.000 475.500 471.750 472.250 −2.000 29,258 Suppose you buy 18 of the September corn futures contracts at the last price of the day. One month from now, the futures price of this contract is 462.5, and you close out your...
Soybean futures contracts are quoted in cents per bushel. Thereare 5,000 bushels per contract. The...
Soybean futures contracts are quoted in cents per bushel. There are 5,000 bushels per contract. The price lit or circuit breaker for soybeans is 60 cents. The quote for Sep. 2021 is 989'6. The prior settle was 986'4. What is the upper and lower limits for trading this contract today?
Soybean futures contracts are quoted in cents per bushel. Thereare 5,000 bushels per contract. The...
Soybean futures contracts are quoted in cents per bushel. There are 5,000 bushels per contract. The price lit or circuit breaker for soybeans is 60 cents. The quote for Sep. 2021 is 989'6. The prior settle was 986'4. What is the upper and lower limits for trading this contract today?
Suppose a farmer anticipates to harvest 500,000 bushels of soybeans. Contract size is 5,000 bushels. The...
Suppose a farmer anticipates to harvest 500,000 bushels of soybeans. Contract size is 5,000 bushels. The initial margin and maintenance margin for soybean futures are $1,980 and $1,800 per contract, respectively. Currently, the farmer has $200,000 cash in his brokerage account, and the price of March 2021 soybeans futures contract is $10.00/bushel. A.) describe how the farmer would hedge his harvest. Clearly state the number of soybeans futures contracts the farmer should buy OR sell. b.) how much money would...
Consider a corn farmer, who will harvest 20,000 bushels of corn in 3 months. Using the...
Consider a corn farmer, who will harvest 20,000 bushels of corn in 3 months. Using the proceeds from the sale of his corn, he plans to pay back a loan in the amount of $140,000 that is due in 3 months. The price of corn today is $7 per bushel. Yet, the farmer receives some news indicating that the price of corn might substantially change within the next 3 months. The farmer gets nervous, as an adverse price change in...
You are long two option contracts: one Chicago Board Options Exchange call contract on a stock...
You are long two option contracts: one Chicago Board Options Exchange call contract on a stock with a strike price of $25 and one put contract with a strike price of $20. You paid a premium for the call options of $3.00 per option share and paid a premium for the put option of $2.00 per option share. Your total profit (loss) if the stock price at expiration were $15.00 would be _$____________
The table below shows the bushels of corn and bottles of wine that China and U.S....
The table below shows the bushels of corn and bottles of wine that China and U.S. can produce from one day of labor under three different hypothetical situations. Product Case 1 Case 2 Case 3 China U.S. China U.S. China U.S. Corn(bushels) 4 2 4 1 4 1 Wine(bottles) 2 1 3 2 2 2 Use the table above to show for each case the commodity in which each country has a comparative advantage or disadvantage. Show your work. Answer...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT