1. Suppose that a farmer, who will have actual corn to sell in three months, sells today a corn futures contract for $.60 per contract. Three months later (just before the delivery date) she covers her position (that is, buys the same contract back) at $.55. During that time the actual (spot) corn price has fallen from $.58 to $.54 per bushel. Which of the following statements is incorrect?
A. The farmer realizes a $.04 gain per unit from her long spot position.
B. The farmer realizes a $.05 gain per unit from her short futures position.
C. Overall, the farmer realizes a net gain of $.01 per unit.
D. This is a typical example of a short hedge using futures contracts.
2. Suppose you buy and have (long) “a $50 June Microsoft call” for $5.00. Which of the following statements is incorrect?
A. This is a buying option with a strike price of $50 expiring in June and the underlying asset is the common stock of Microsoft.
B. You have the right to buy the common stock of Microsoft at $50 until the expiration date in June regardless of the actual price of the stock.
C. If the current price of Microsoft stock is $45, this call is in the money.
D. If you have a “corresponding” put option, you have the right to sell the stock.