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Curtin University - FINANCE INVE3000 An investor buys a call option on a futures for gold
Curtin University - FINANCE INVE3000
An investor buys a call option on a futures for gold. The contract size is 100 ounces. The strike price is 1,800. The investors exercises the option when the futures price is 1,840 and the most recent settlement price is 1,838. Which answer is true?
- The investor receives a long position in the contract and $4,000.
- The investor receives a short position in the contract and pays $3,800.
- The investor receives a long position in the contract and $3,800.
- The investor receives a short position in the contract and receives $3,800.
- None of the above
Expert Solution
Answer:
c ) The investor receives a long position in the contract and $ 3,800 .
Step-by-Step explanation
A call option gives the buyer, a right, not an obligation to buy assets at an agreed price on or before a particular date.
In this question:
Strike price = $1,800
Settlement price = $1,838
Thus, it will be beneficial for the buyer to exercise his option. Thus, we may say that the investor receives a long position.
His profit from the long position:
Profit = (1,838 - 1,800)*100
38*100
3800
Thus, he receives $3,800
Hence the right answer is (C).
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