Suppose you purchase the June 2014 call option on corn futures with a strike pri

Question

Suppose you purchase the June 2014 call option on corn futures with a strike price of $5.25 at the last price of the day. Use Table 23.2

How much does your option cost per bushel of corn? (Do not round intermediate calculations. Round your answer to 5 decimal places, e.g., 32.16161.)

Suppose the price of corn is $5.19 per bushel at expiration of the option contract. What is your net profit or loss from this position? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Enter your answer as a positive value.)

What is your net profit or loss if corn futures prices are $5.31 per bushel at expiration? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Enter your answeras a positive value.)

Suppose you purchase the June 2014 call option on corn futures with a strike price of $5.25 at the last price of the day. Use Table 23.2

TABLE 23.2 Corn Options Quotes Globex View another product.. Sample CME Group Futures Option Price Quotations Settlements Time & Sales Contract Specs Margins SoURCE: Reprinted by permission of the CME Group (www.cmegroup .com), May 9, 2014 All Rights Reserved Worldwide Globex Open Outcry Futures Open Outcry Auto Refresh is Futures Market data is delayed by at least 10 minutes 21248 4724 14.3852 CT 09 Way 2014 Jul 2014 5074 a Type Amencan Options Expiration Jun 2014 Strike Range At The Money CALLS Updated Limit Volume High LoW Settie Chang Last Pnce Last Change Settie Low High Volume Limit Updated 1430:00 14:3000 No 363b 232 329'4 2423 486.0 14 2 12 0a Limit 03 May 00 May 2014 2014 14:3000 CT 1430:00 CT 09MayLimt 502 320b 118 283'2 201a 450.0 24b | +0'5 | T7 | 10 | 26 bl 1.581 Limit 09Ma 2014 2014 14.30:00 CT 14.3000 CT 0 275b 154a 242 9'0162 a 4950 09 May Umt Limit 09 May 14.30:00 14:3000 719 235b 130 203 75 126 500.0 52b | +1'3 | 37 | 20 | 57b | 1,876 09 MayLimt 2014 imit 09 May 2014 CT CT 09MayUmt Limit 09Ma 2014 14:30.00 14:3000 02 May Lim9164 138 -8'2 74 510.0 100 b 2672 44 108b1 Limit 09May 2014 14:30:00 09 MayLimt 14:3000 731 133 50 110 5'4 54 515.0 131b +3% | g'3 6'1 1401 1.345 Limit 09 May 2014 2014 14.30:00 14.3000 520.0 164 b B3 173b 09MayUmt Limit 09May 1430:00 14 3000 326 93 253 66 3'6 273 526.0 203b 52151 1203 212D Limit 09 May 00 May 2014 2014 430 00 14 3000 CT CT 09MayUimt 640 71 50 3020 530.0 243b 184153a 253 b Limit 09Ma 2014 2014

Explanation / Answer

Corn Option on Corn Futures is a derivative in which the underlying asset is the future contract on corn. A call option in this case would mean that the investor will have the option (but not obligation) to go long (purchase) on corn futures contract at the end of the option period. A put option would mean that the investor would have the option (but not obligation) to go short (sell) on corn futures at the end of option period.

In this problem one option contract is for 5000 corn bushels with each option premium (the option price) being priced at $2.7 (a) , per corn bushel. The (a) denotes the ask price or the price at which the investor can purchase the contract from the exchange. ( The option premium is quoted in the attached picture as Last Settled Price)

Therefore, the option price (premium) oer corn bushel = $2.7

Since, each contract is of 5000 bushels, the cost of the position would be = 5000 x option price per bushel = 5000 x 2.7 =$13500. ( This cost is a cash outlflow for the investor)

If corn bushel price =$5.19 at option expiry, with strike price= $5.25 (given in question) , then the investor will not exercise the call option. (as he/she can purchase the underlying asset (futures contract on corn) at the lower market price of $5.19 instead of paying $5.25 as part of the options contract)

Therefore, net loss to the investor = Cost of initial position in corn options = $13500.

If corn bushel prices = $5.31 which is higher than the strike price of $5.25 then the investor will excercise the call option to purchase corn futures (the underlying asset). By purchasing at a lower than market price the investor makes a net gain.( as he/she can sell the purchased futures in the market at a price of $5.31 which is higher than the strike (purchase price for investor) price of $5.25, thereby making a profit)

Therefore, gain made by investor = (5.31 - 5.25) x 5000 = $550

Therefore, net loss of the investor = Cost of initial position Less Gain on call option exercise = 13500 - 550 = $ 12950.

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