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Assuming you are a gold trader. You expect to buy 1,000 g of gold on 20 November. Since the gold price in the market is
Assuming you are a gold trader. You expect to buy 1,000 g of gold on 20 November. Since the gold price in the market is on an increasing trend, you decided to purchase a call option from a counterparty (call writer). The strike price of the gold is $235 per g and you will have to pay an option premium of $10 per g for this right.| a) Under what circumstances will the call option be exercised? [2m] b) Calculate the breakeven price of the call option. [3m] c) Calculate the gross and net profit associated with the call option assuming the gold prices range from $205 to $265 in multiples of $10. Use a table. [7m] d) Draw a diagram (graph) showing the variation of the trader's profit with the gold price at the maturity of the option. [5m] e) Let's say you are a call writer instead of call buyer, how would your graph looks like using the same information above? [5m] f) If the gold price increase to $245, what would be the price at which you buy your gold if you have used a forward contract? [2m] g) If the gold price decrease to $225, what would be the price at which you buy your gold if you have used a forward contract? [2 m)
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