A plastic manufacturer is concerned about the rising prices of oil. The market is currently at $25 per barrel. The manufacturer is afraid of the market rising above $30 per barrel.

To remedy this issue, the manufacturer will purchase a call option at $30 per barrel. The price of the contract is $1. Contract size is 1,000 barrels. The manufacturer decides to buy 230 contracts. The call option strike price is equal to the forecasted price of oil in the near term.

1. Who pays and who receives the option premium?

2. What happens if the price of oil stabilizes at $30 a barrel at expiration?

3. What happens if the market price of oil never exceeds $30 a barrel? (For the option holder and the option writer)?

4. What is the holder of the option (options) if the price of oil settles/closes at $33 at expiration? What is the profit/loss for the holder of the contracts?

Answer rating: 100% (QA)

Options and the Oil Price Who pays and receives the option premium The manufacturer pays the option ... View the full answer