A company can buy an option for the delivery of one million units of a commodity in

Question:

A company can buy an option for the delivery of one million units of a commodity in three years at $25 per unit. The three year futures price is $24. The risk-free interest rate is 5% per annum with continuous compounding and the volatility of the futures price is 20% per annum. How much is the option worth?

Compounding
Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will...