Question

In July 2012, a small chocolate factory receives a large order for chocolate bars to be delivered in November. The spot price for Cocoa is $2,400 per metric ton. It will need 10 metric tons of Cocoa in September to fill this order. Because of limited storage capacity and volatility in the world cocoa prices, the company decides the best strategy is to buy 10 call options for $53 each with strike price of $2,400 (equal to the current price) with a maturity date of September 2012. When the options expire in September, how much will the company pay (including the cost of the options) for cocoa if the spot price in September proves to be $2,600, and if the spot price in September proves to be $2,300.

		$23,470
		$24,530
		$23,530
		$22,470
		$23,000

Answer 1

Youy have call options.

Call options will be exercised only, if price on expiry > strike price

strike price = 2400

Premium paid = 53 for each contract

so total premium paid = 530 for 10 contracts

CASE 1 : PRICE = 2600

As price on expiry = 2600 > strike price = 2400

call option will be exercised.

company will pay = 2400 x 10 + 530 = 24530

CASE 2 : PRICE = 2300

As price on expiry = 2300 < strike price = 2400

call option will not be exercised. will purchase from open market

company will pay = 2300 x 10 + 530 = 23530

Answer : 24530, 23530