Futures Options and Black’s Model-Quiz 1

Practice Questions

Problem 16.8.
Suppose you buy a put option contract on October gold futures with a strike price of $1,200 per
ounce. Each contract is for the delivery of 100 ounces. What happens if you exercise when the
October futures price is $1,160?

You gain (1,200 −1,160)×100 = $4,000. This gain is made up of a) a short futures contract in
October gold and b) a cash payoff you receive which is 100 times the excess of $1,200 over the
previous settlement price. The short futures position is marked to market in the usual way until
you choose to close it out.

Problem 16.9.
Suppose you sell a call option contract on April live cattle futures with a strike price of 140 cents
per pound. Each contract is for the delivery of 40,000 pounds. What happens if the contract is
exercised when the futures price is 145 cents?

In this case, you lose (1.45 −1.40)×40,000 = $2,000. The loss is made up of a) a cash payoff you
have to make equal to 40,000 times the excess of the previous settlement price over the previous
settlement price and b) a short April futures contract.