Corn call options with a $1.75 strike price are trading for a $0.14 premium.Farmer Jayne decides to hedge her 20,000 bushels of corn by selling short call options.Six-month interest rates are 4.0% and she plans to close her position in 6 months.What is the total premium she will earn on her short position?
A) $2,800
B) $2,912
C) $800
D) $1,600

Question

Quizplus · Accepted Answer

- Farmer Jayne sells 200 call options (20,000/100) with the strike price of $1.75.
- She earns a premium of $0.14 per bushel, which is $14 per option.
- Thus, she earns a total premium of $2,800 ($14 x 200).
- Since she plans to close her position in 6 months, she can invest this premium amount in a risk-free rate for 6 months.
- Using the six-month interest rate of 4.0%, the future value of the premium earnings would be $2,912 ($2,800 x (1 + 0.04/2)^2). 
- Therefore, the total premium earned on the short position is $2,912.

Corn Call Options with a $1