In this question we will practice some ideas discussed in Module 3 and build up to a point that we will discuss in Module 4. Just follow the prompts below and do the calculations step by step. You bought a put on the live cattle futures contract for December 2023 delivery with strike price of $1.9300/lb. You paid $0.0700/lb (premium) for this put. Moving forward, let's say that it's two weeks before expiration and you decide to get rid of your put. The premium of the put with strike of $1.9300/lb is now trading at $0.0950/lb. The futures price of the underlying live cattle futures contract for December 2023 delivery is currently $1.8550/lb.

[a] When you are getting rid of your put two weeks before expiration, what is the intrinsic value of your put? And what is the time value?

[b]If you decide to get rid of your put by selling it in the options market, how much money would you make or lose? Assume we have no transaction fees here.

[c] If you decide to get rid of your put by exercising it, how much money would you make or lose in total (counting your transactions in the options market and in the futures market)? Assume we have no transaction fees here.

• Note: When you exercise your put, you get a position in the futures market at the strike price of the put. So you will be selling in the futures market at $1.9300/lb. Then you go ahead and immediately offset your futures contract at the current futures price in the market ($1.8550/lb). Your total gain/loss with the whole trade will be your gain/loss in the futures market minus the amount of money you paid (premium) to buy the put in the beginning.

[d] Now look at the difference between your gain/loss by selling the put (as in [b]) and your gain/loss by exercising the put (as in [c]). How does this difference in gain/loss compare to the time value of the put that you calculated in [a]?

[e] Looking at your results in [b] and [c] and just focusing on the monetary gain/loss, would you say it makes a difference to get rid of an option by selling it or exercising it? Can you answers in [d] help explain this?