Suppose a financial manager buys call options on 50,000 barrels of oil with an e

Question

Suppose a financial manager buys call options on 50,000 barrels of oil with an exercise price of $93 per barrel. She simultaneously sells a put option on 50,000 barrels of oil with the same exercise price of $93 per barrel. Consider her gains and losses if oil prices are $87, $90, $93, $96, and $99. (Do not round intermediate calculations. Leave no cells blank - be certain to enter "0" wherever required. A negative answer should be indicated by a minus sign.)

  

  Market price $87 $90 $93 $96 $99   Payoffs per barrel $ $ $ $ $

Explanation / Answer

The call options give the managers the right to purchase oil futures contracts at a futures price of $93 per barrel.

The manager will excercise the option if the price rises above 93.

Selling put options obligates the manager to buy oil futures contract at a future price of $93 per barrel.

The put holder will excercise the option if the price falls below $93.

Particulars Oil futures price 87 90 93 96 99 Value of call option position 0 0 0 3 6 value of put option position -6 -3 0 0 0 Total Value -6 -3 0 3 6

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