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.