Question

This and the following three questions are related: Suppose that you are a major airline that has budgeted a price of fuel of 1.3840 USD/gal for fiscal year 2021 and you plan to end up buying 1 million gallons of it. To hedge against possible increases in the price you buy a one-year call option with a strike price of 1.4539 USD/gal for 1 million gallons with a premium of 1 cent/gal. How much would you the total premium of the option be

Answer 1

A. 10,000 USD

Step-by-step explanation:

Total premium will be as given below

= 1 million gallons * 1 cent/gal

= 1,000,000 * (1/100)

= 10,000USD

Note: Options to question is as attached