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Your cousin is a hog farmer and he invests in pork belly futures and options contracts.  He...

  1. Your cousin is a hog farmer and he invests in pork belly futures and options contracts.  He has told you that he believes pork belly prices are on the rise.  You decide to purchase a call option on pork bellies with a strike price of $0.50 per pound.  That way, if pork belly prices go up, you can exercise the call, buy the pork bellies, and sell them for the higher spot price.  Assume the price of an option on 40,000 pounds is $1,000 and you purchase five options for $5,000 on 200,000 pounds.
    1. Would this be a risk-reducing or speculative action for you?
    2. What is your downside risk in dollars and percentage terms?
    3. If the price per pound increases to $0.55 per pound, how much would you net after paying for the options?
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