Answered step by step
Verified Expert Solution
Question
1 Approved Answer
A miller wants to establish a maximum buying price for wheat. It is May 19th and he needs to buy the product on August 15th.
A miller wants to establish a maximum buying price for wheat. It is May 19th and he needs to buy the product on August 15th. He also wants to be able to take advantage of potentially lower wheat prices between May and August. To do this, he buys one $6.00/bu September Wheat Call for $0.50 when September futures trade at $6.35/bu. The expected local basis in August is $0.05/bu above futures.
- On August 15th, when the miller buys wheat, the basis is $0.25/bu above futures, which trade at $6.55/bu. The $6.00/bu September Call Wheat is trading at $0.65. What is the time value of the $6.00/bu September Wheat Call on August 15th? If the TV was $0.15 on May 19th, did the TV increase or decrease? (4 points)
- Would the miller be better off exercising the option or offsetting his position by selling the Long Call back?Why?(6 points)
- Instead, assume the price of the contract in August was $5.95/bu? What should the miller do in this circumstance? What is the actual buying price? Why? (6 points)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Analyzing the Wheat Call Option Time Value on August 15th Intrinsic Value At 655 futures and 025 bas...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started