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University of Miami Forward Contracts and Options Market Questions

Can you help me understand this Finance question?

In no less than 200 words, provide the correct answers to the two questions below and explain the answers to the questions. Use at least one example for each question.

Forward Contracts

Ron Burgundy, a retired newscaster, has begun farming corn crops to generate supplemental income in his retirement years. Ron, unaware of the financial implications of pricing fluctuations in corn crops based on supply and demand economics, has hired a financial advisor, Brian Fantana, to aid in operations of the business. The next season is forecasted to be a healthy farming season with a possible oversupply of corn. Fantana has identified that the upcoming harvest may lead to lower market prices for corn based on the oversupply. The oversupply of corn is forecasted to drive prices down to an estimated $0.20/lb with total harvesting costs totaling $0.25/lb. Entering into a forward contract with a large volume corn purchaser with a $0.37/lb pricing agreement will yield a net harvest profit in $/lb of _______.




4.$0.00/lb (break even)

Options Markets

Joe Dirt, a wealthy hillbilly investor who has been introduced to a no-fee investment platform, has begun placing excess income into his margin account after identifying that equity markets may provide lucrative returns over time. Joe has become a self-educated investor who has recently learned the functions of the options market. Joe’s favorite automotive supply company, Autozone, Inc. (AZO), has had a powerful run-up in its stock price, gaining over 49% in its price to $1,683.76 over the past year. Joe feels that the run-up in prices is just beginning, and the stock’s price is due for additional gains. As such, Joe purchases a call option with a November 19, 2021 expiration and an in-the-money strike price of $1,600 for a total of $116.60/share, or $11,660 for the contract. The option is held to expiration and the stock’s price has fallen to $1,634. Joe’s gain / (loss) at expiration from the call option is ______.


2.$0 (break even)




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