OPTIONS. You purchase a call option on July cocoa with a strike price of 1600 per metric ton. The premium on the option is $30 per metric ton. The contract size for cocoa is 10 metric tons.
a) Is this option in the money, out of the money or at the money? Explain.
b) If you exercise your option when cocoa is trading at $1750 per metric ton, what is your profit or loss on the transaction?
c) The July cocoa price increases to $1605. At the same time the option premium increases to $55 per ton. What is your profit or loss on the transaction if you decide to sell your option?
d) Why is it generally better to offset the option rather than exercise it?