Refer to Practice 19-7 and complete the following:
1. Compute the total amount (including all option-related cash flows) that the shirt company will pay to buy 50,000 pounds of cotton in January of Year 2, assuming that the price of cotton per pound on January 1 of Year 2 is (a) $0.68, (b) $0.32, and (c) $0.46. Comment on your computations.
2. Assume that the party who wrote the cotton call option contract was a speculator. When that speculator wrote the cotton call option on December 1 of Year 1, which direction did the speculator think that cotton prices were going to go—up or down? Explain.