North Shore Railroad Operates Between Chicago and Upper Michigan and Wisconsin.Dallas

question 20

Essay

North Shore Railroad operates between Chicago and upper Michigan and Wisconsin.Dallas Ingold, purchasing manager of North Shore Railroad, anticipates the price of diesel fuel will increase over the next few months.On September 4th, Ingold purchased an out-of-the-money November call option for $1,100.The option has a notional amount of 80,000 barrels and a strike price of $2.16 per barrel.Diesel fuel spot rates and option values at selected dates follow:
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$\begin{array}{lrr}& \text { Spot Rate } & \text { Option } \\\text { Date } & \text { per Barrel } & \text { Value } \\\text { September } 30 & \$ 2.17 & \$ 1,130 \\\text { October } 31 & 2.13 & 1,026 \\\text { November } 27 & 2.19 & 2,400\end{array}$

a.For each of the above dates, calculate the intrinsic value and the time value of the option.?
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b.If the price of diesel fuel remained below $2.16 per barrel through November, calculate the effect on earnings traceable to the hedge.

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Definitions:

Kinesthetic

Refers to the sense that detects bodily position, weight, or movement of the muscles, tendons, and joints.

Vestibular

Relating to the inner ear system that helps control balance and eye movements.

Orientation

Awareness of oneself in relation to time, place, and identity.

Rods And Cones

Photoreceptor cells in the retina of the eye that are responsible for vision under low light conditions (rods) and color vision and detail in well-lit conditions (cones).