Question

Today is 1 May. Suppose you bought an American put option on October-maturing live cattle future...

Today is 1 May. Suppose you bought an American put option on October-maturing live cattle future contract with a strike price of 60 cents per pound. Each contract is for the delivery of 50000 pounds.

A).Please illustrate what happens if you exercise this option on 31 May when the October- maturing live cattle futures price is 50 cents per pound.

B).After exercising the put option, you decide to hold the underlying futures contract to the expiry and you closed out your future position on 31 October. Given that the October-maturing live cattle futures price is 45 cents per pound on 31 October, what is gain/loss on your future position. How much did spend on purchasing 50000 pounds of live cattle on 31 October ? (i.e. please ignore time value of money )

C).After taking the gain/loss of your futures position into account, what’s the effective price you’ve realised for 50000 pounds of live cattle on 31 October? Please detail all the steps in your answer. ( i.e.please ignore time value of money )

Homework Answers

Answer #1

Strike Price, K = 60 cents per pound

Asset price on the day of exercise, S = 50 cents per pound

Quantity = Q = 50,000 pounds

Part (a)

If the option is exercised, your payoff = max (K - S, 0) x Q = max (60 - 50, 0) x 50,000 = 10 cents x 50,000 = $ 5,000

Part (b)

Future price on 31st May = F0 = 50 cents per pound

Futures price on 31 October = F1 = 45 cents per pound,

Gain/loss on your future position = (F1 - F0) x Q = (45 - 50) cents x 50,000 = - $ 2,500 i.e loss of $ 2,500

Amount spent on purchasing 50000 pounds of live cattle on 31 October = F1 x Q = 45 cents per pound x 50,000 = $ 22,500

Part (c)

Amount spent = $ 22,500

Loss = $ 2,500

Total amount paid = $ 22,500 + 2,500 = $ 25,000

Q = 50,000

Price realized = Total amount paid / Q = $ 25,000 / 50,000 = $ 0.50 per pound = 50 cents per pound.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
One orange juice futures contract is on 15,000 pounds of frozen concentrate. Suppose that in September...
One orange juice futures contract is on 15,000 pounds of frozen concentrate. Suppose that in September 2016 you sell a March 2018 orange juice futures contract for 120 cents per pound. The futures price is 140 cents in December 2016 and 110 cents in December 2017. You close out the position at 125 cents per pound in February 2018. What is your gain or loss in December 2016? What is your gain or loss when you close out the position?...
Suppose you bought one put option for one ounce of gold with a strike price of...
Suppose you bought one put option for one ounce of gold with a strike price of $1,550 per ounce. You paid a premium of $7 for this option and you held the option until expiration. Suppose the market price of gold is $1,500 per ounce at expiration. What is your gain or loss on the option contract?
Your are in New Zealand. You are planning to price an American put option on Canadian...
Your are in New Zealand. You are planning to price an American put option on Canadian dollar futures, maturing in 4 months. You plan to use a 2 step tree. The New Zealand interest rate is 0.70%, while the Canadian interest rate is 3.50% (both with continuous compounding). The Canadian dollar futures price has volatility 20.00%. What is the risk neutral probability for the up state?
On October, you own 10,000 shares of Don’t Worry Be Happy Inc. The spot price is...
On October, you own 10,000 shares of Don’t Worry Be Happy Inc. The spot price is $90 per share. You plan to sell the shares in November to pay for a house you have just bought. You are concerned that share prices will FALL substantially by November. There is a December futures contract on 100 shares of Don’t Worry Be Happy Inc. The futures price is $91 per share. You estimate the following regression for the hedging period: Design an...
Section 2 Calculations. 5pt each, 50 pts total. Show your work! Suppose, the spot exchange rate...
Section 2 Calculations. 5pt each, 50 pts total. Show your work! Suppose, the spot exchange rate is Euro €1.00 = $1.50 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 1% in the euro zone. Under the PPP, what is the one-year forward rate, €1 = $_________, that should prevail, round to 4 decimal places? Yesterday, you entered into a futures contract to buy Euro 62,500 at $1.5500 per Euro. Your...
You sold a put contract on EDF stock at an option price of $.50. The option...
You sold a put contract on EDF stock at an option price of $.50. The option had an exercise price of $21. The option was exercised. Today, EDF stock is selling for $20 a share. What is your total profit or loss on all of your transactions related to EDF stock assuming that you close out your positions in this stock today? Ignore transaction costs and taxes.
Suppose you bought an American call option two weeks ago and paid a premium of $5....
Suppose you bought an American call option two weeks ago and paid a premium of $5. You look at your account now and see that the option is in-the-money and has two weeks remaining until expiry. Summarize all the possible decisions that you could make right now with respect to this option position. Provide as much detail as possible regarding the mechanics of your decision (i.e. how you would implement the decision and what would happen as a result).
Please explain your answer. 1. Suppose you short one IBM May 100 put contract at $5...
Please explain your answer. 1. Suppose you short one IBM May 100 put contract at $5 and long one IBM May 105 put contract at $2. Your maximum profit/loss from your strategy would be Multiple Choice gain of $200. loss of $300. loss of $200 gain of $300. None of the above. 2. Suppose you purchase one WFM May 100 put contract at $5 and write one WFM May 105 put contract at $2. The maximum potential profit/loss per contract...
Please explain your answer. 1. Suppose you short one WFM May 100 put contract at $5...
Please explain your answer. 1. Suppose you short one WFM May 100 put contract at $5 and long one WFM May 105 put contract at $2. Your maximum profit/loss from your strategy would be Multiple Choice gain of $200. loss of $300. loss of $200 gain of $300. None of the above. 2. Suppose you purchase one WFM May 100 put contract at $5 and write one WFM May 105 put contract at $2. The maximum potential profit/loss per contract...
You bought 100 Google Shares for $400 each. You also bought 1 put option on Google...
You bought 100 Google Shares for $400 each. You also bought 1 put option on Google with a strike of $395 for $20. a)         What is the maximum loss on your position? b)         What is the profit on your position when the stock hits $440? c)        Draw the profit/loss diagram for this position clearly marking the maximum loss, and breakeven .