Could you please help with Question H and check if questions I-M are correct? Thanks! THERE IS NO LOT SIZE OPTION PROVIDED.
PROBLEM 6 (50 points) Suppose that you know today that you will be purchasing a pen of segregate early weaned pigs a few months from now and that you will need 10,000 bushels of corn for feeding purposes. Additionally, you know that given the current corn cash price of $2.35/bu., you have the potential to feed-out these pigs for a profit. However, you are concerned that the corn price may move against you before you purchase the hogs. You purchase a $2.55/bu. call option for $0.30/bu. and expect the basis to be $0.05 under. When you are ready to purchase the hogs and corn to make feed, the cash and futures prices have increased to $3.00/bu. and $3.05/bu., respectively. Assuming zero time value and that the broker charges a commission of $50 per option traded, answer the questions below. h. Compute the target price. i. Compute the gain/loss per bu. you have earned on options in terms of the premium as a result of price change. The premium gain will be $0.30 per bushel Gain in money=$3.05-$2.55= $0.50 less premium paid =$0.30- ($2.55-$2.35)= $0.10 j. Compute the effective buying price (EBP), and by comparing it to your target price comment on whether it was a good deal. EBP= Strike Price + Premium + Commissions = $2.55 +0.30 + ($50/10.000) = $2.85 Therefore the deal is good as the existing price is higher than the EBP. k. Compute the overall gain/loss as a result of dealing with the options. The overall gain is 1,450 Are you better/worse off as a result of dealing with options as opposed to not dealing with options at all, and why? Better off because the price moved against the buyer. He could have had to pay higher cost if he hasn't take the options. m. Give an example of a futures price that would render your call option out-of-the- money. A Futures Price of $2.55 or anything less than that. PROBLEM 6 (50 points) Suppose that you know today that you will be purchasing a pen of segregate early weaned pigs a few months from now and that you will need 10,000 bushels of corn for feeding purposes. Additionally, you know that given the current corn cash price of $2.35/bu., you have the potential to feed-out these pigs for a profit. However, you are concerned that the corn price may move against you before you purchase the hogs. You purchase a $2.55/bu. call option for $0.30/bu. and expect the basis to be $0.05 under. When you are ready to purchase the hogs and corn to make feed, the cash and futures prices have increased to $3.00/bu. and $3.05/bu., respectively. Assuming zero time value and that the broker charges a commission of $50 per option traded, answer the questions below. h. Compute the target price. i. Compute the gain/loss per bu. you have earned on options in terms of the premium as a result of price change. The premium gain will be $0.30 per bushel Gain in money=$3.05-$2.55= $0.50 less premium paid =$0.30- ($2.55-$2.35)= $0.10 j. Compute the effective buying price (EBP), and by comparing it to your target price comment on whether it was a good deal. EBP= Strike Price + Premium + Commissions = $2.55 +0.30 + ($50/10.000) = $2.85 Therefore the deal is good as the existing price is higher than the EBP. k. Compute the overall gain/loss as a result of dealing with the options. The overall gain is 1,450 Are you better/worse off as a result of dealing with options as opposed to not dealing with options at all, and why? Better off because the price moved against the buyer. He could have had to pay higher cost if he hasn't take the options. m. Give an example of a futures price that would render your call option out-of-the- money. A Futures Price of $2.55 or anything less than that
