Problem I

Mega company is confident that oil prices will increase in the

coming months. Therefore, the company decided to buy the sell option for oil as

a price risk hedge to hedge against the estimated increase in oil price from

the purchase of oil. On November 30, 2019 Mega purchased a call option for

10,000 barrels of oil at a price of $ 30 per barrel at a premium of $ 2 per

barrel, with a purchase date of March 1, 2020.

The following is information related to the transaction:

Futures price Date Cash Price (for delivery on 1 March 2020) November 30, 2019 30 31 December 31, 2019 31 32 March 1, 2020 32 Date Time Intrinsic value value Total value November 30, 2019 $ 20,000 20,000 December 31, 2019 $ 6,000 10,000 16,000 March 1, 2020 30,000 30,000