Suppose you purchase the July 2011 call option on orange juice futures with a st

Question

Suppose you purchase the July 2011 call option on orange juice futures with a strike price of $1.40. Use Table 23.2 How much does your option cost per pound of orange juice? (Round your answer to 4 decimal places. (e.g., 32.1616)) Option cost $ per pound What is the total cost? Total cost $ Suppose the price of orange juice futures is $1.29 per pound at expiration of the option contract. What is your net profit or loss from this position? (Input the amount as a positive value.) $ What is your net profit or loss if orange juice futures prices are $1.67 per pound at expiration? (Input the amount as a positive value.) $

Explanation / Answer

Part 1)

The price quote is $0.0835 per pound . The size of each contract is 15,000 pounds. The total cost of the contract is calculated as follows:

Total Cost = ($0.0835 per pound)*(15,000) = $1,252.50

________

Part 2)
If the price of orange juice at expiration is $1.29 per pound, the call is out of the money. It is so because the strike price is above the spot price. In this case, the option will not be exercised and it will be allowed to expire.

Total Loss = Total Investment Value = $1252.50 or $1253

________

Part 3)
If orange juice prices at contract expiration are $1.67 per pound, the call is in the money. It is so because the strike price is below the price per pound. In this case, the option will be exercised the net payoff would be:

Payoff = ($1.67 – 1.40)(15,000) = $4,050

The total profit is calculated as follows:

Total Profit = 4,050 - 1252.50 = $2,797.50 or $2,798

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