The company makes colorful 100% cotton shirts that are very popular among sophisticated business executives. The company uses 100,000 pounds of cotton each month in its production process. On December 1 of Year 1, the company purchased a call option to buy 100,000 pounds of cotton on January 1 of Year 2. The option exercise price is $0.39 per pound. It cost the company $2,500 to buy this option. As with most derivative contracts, this option contract will be settled by an exchange of cash on January 1 of Year 2 based on the price of cotton on that date. What net amount will the shirt company pay or receive on January 1 of Year 2 under the option contract f the price of cotton per pound on that date is (1) $0.52, (2) $0.30, and (3) $0.39?

Remember that the option contract is for 100,000 pounds and that the shirt company has the option to buy the cotton.