Corn call options with a $1.70 strike price are trading for a $0.15 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 and sell her corn in 6 months.What is her profit or loss if spot prices are $1.60 per bushel when she closes her position?
A) $1,000 loss
B) $2,000 gain
C) $2,120 loss
D) $2,120 gain

Question

Quizplus · Accepted Answer

Farmer Jayne sells short call options, which means she receives the premium upfront. The premium is $0.15 per bushel, and she has 20,000 bushels, so she receives 20,000 * $0.15 = $3,000 initially. Since the spot price at closing is $1.60, which is below the strike price of $1.70, the options are not exercised, and she keeps the premium. Therefore, her profit is the $3,000 premium. However, the question asks for the profit or loss when she sells her corn, not from the options trade directly. Since the spot price is $1.60, and there's no indication that the options trade directly impacts the selling price of her corn, the profit from the options trade remains $3,000. The options trade and the sale of the corn are considered separately for this calculation, and the question specifically asks for the profit or loss from the options position, which is a gain of $3,000. The choices provided do not match this calculation directly, suggesting a misunderstanding in the question's intent or a mistake in the calculation. Given the options, the closest correct approach based on the information provided would be to consider the premium received as the profit from the options trade, but none of the choices exactly match this calculation.

Corn Call Options with a $1