Question

Assuming you are a gold trader. You expect to buy 1,000 g of gold on 30 December. 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) 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?

b) 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?

Answer 1

(a) If the gold price increases to 245$, i would be excercising my forward contract where it is stating that i will buy gold in december at 235$ per gram because market price is greater than the price that i have an agreed with the call writer.

Hence i would excercise my option to purchase gold at 235$ per gram.

(b)Since the gold price decreased to 225$ per gram in the market, i would buy it from market since i have to pay 235$ per gram if i excercise the contract.

Hence i would buy gold from marketat 225$ per gram.