Refer to Practice 19-7 and complete the following:

1. Compute the total amount (including all option-related cash flows) that the shirt company will pay to buy 100,000 pounds of cotton in January of Year 2, assuming that the price of cotton per pound on January 1 of Year 2 is

(a) $0.52,

(b) $0.30, and

(c) $0.39.

Comment on your computations.

2. Assume that the party who wrote the cotton call option contract was a speculator. When that speculator wrote the cotton call option on December 1 of Year 1, which direction did the speculator think that cotton prices were going to go—up or down? Explain.