For each of above dates compute intrinsic value and time, Ask an Expert

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Q1) North Shore Railroad operates between Chicago and upper Michigan and Wisconsin. Dallas Ingold, buying manager of North Shore Railroad, anticipates price of diesel fuel will rise over next few months. On September 4th, Ingold bought an out-of-the-money November call option for $1,100. Option has notional amount of 80,000 barrels and strike price of $2.16 per barrel. Diesel fuel spot rates and option values at chosen dates follow:

Date	Spot Rate per Barrel	Option Value
September 30	$2.17	$1,130
October 31	2.13	1,026
November 27	2.19	2,400

a) For each of above dates, compute intrinsic value and time value of option.

b) If price of diesel fuel remained below $2.16 per barrel through November, compute effect on earnings traceable to hedge.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M917984

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