Suppose you buy a put option contract on the June gold futures with a strike pri

Question

Suppose you buy a put option contract on the June gold futures with a strike price of $1, 200 per ounce. Each contract is for the delivery of 100 ounces. What is your profit if you exercise the put when the June futures price is $1,160? 0 $1,160 $1, 200 $4,000 $120,000 Consider a four-month European put futures option with a strike price of $50 when the continuously compounded risk-free interest rate is 10% per year. The current futures price is $47. What is the best lower bound for the value of the futures? 0 $2.71 $2.90 $3.00 $3.10

Explanation / Answer

Problem 1: D-$4000. If the June Fututres Price of Gold is $1160 per Ounce and I have an Option to Sell the same at $1200 per ounce, I will make a profit of (1200-1160)100= $4000

Problem 2: E-$3.1

Cost of Futures= S[(1+r)^t-1]

                      =50[(1+0.1)^4/12-1]

                       =-43.899

Best lower bound =Current Market Price+cost of Interest

                            =47-43.899

                             =3.1

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