Question

On September 15th, a corn grower wants to protect their profits from the upcoming harvest by establishing a minimum selling price for his corn. To do this, he buys a $5.60 /bu December Corn Put for $0.60 when the price of the December contract is $5.30/bu. The expected local basis in November is $0.20 /bu above futures.

Calculate the intrinsic value and time value of the December Put on September 15 th. Is the option "in the money" or "out of the money?"

Answer 1

The intrinsic value and time value of the December Put can be calculated by determining whether the option is in the money or out of the money. The intrinsic value is the difference between the strike price and the market price, while the time value is the difference between the market price and the intrinsic value.

Step-by-step explanation:

Intrinsic Value of the December Put
To calculate the intrinsic value of the December Put, we need to determine whether the option is in the money or out of the money. For a put option to be in the money, the strike price must be higher than the market price. In this case, the strike price is $5.60 and the market price is $5.30, so the put option is in the money. The intrinsic value is the difference between the strike price and the market price: $5.60 - $5.30 = $0.30.

Time Value of the December Put
The time value of an option is the difference between its market price and its intrinsic value. In this case, the market price of the December Put is $0.60 and the intrinsic value is $0.30, so the time value is $0.60 - $0.30 = $0.30.
Therefore, the intrinsic value of the December Put on September 15th is $0.30 and the time value is also $0.30.