Question

Assume you manage a cheese factory that has to purchase milk and

worries about rising milk prices.
You purchase a milk call option with a strike
price of $25.00 at a premium cost of $2.00. Also, assume local basis is expected to be +$1.00.
What would your net price be if the futures price ends up at $26.20 and basis is exactly what you expected?

Answer 1

To calculate the net price, we need to consider the strike price, the premium cost, the futures price, and the basis.

Given:

Strike price = $25.00

Premium cost = $2.00

Futures price = $26.20

Basis = +$1.00

To calculate the net price, we subtract the strike price from the futures price and add the basis. Then, we subtract the premium cost from the result.

Net Price = (Futures price - Strike price) + Basis - Premium cost

Net Price = ($26.20 - $25.00) + $1.00 - $2.00

Net Price = $1.20 + $1.00 - $2.00

Net Price = $0.20

Therefore, if the futures price ends up at $26.20 and the basis is exactly as expected, your net price would be $0.20 per unit of milk.

Step-by-step explanation:

hope it help