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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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  • Reference No.:- M917984

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