Determine the intrinsic value and time value of option

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Reference no: EM1310845

Calculation of intrinsic value and effect on earnings traceable to the hedge.

North Shore Railroad operates between Chicago and upper Michigan and Wisconsin. Dallas Ingold, purchasing manager of North Shore Railroad, anticipates the price of diesel fuel will increase over the next few months. On September 4th, Ingold purchased an out-of-the-money November call option for $1,100. The option has a notional amount of 80,000 barrels and a strike price of $2.16 per barrel. Diesel fuel spot rates and option values at selected dates follow:

Date	Spot Rate per Barrel	Option Value
September 30	$2.17	$1,130
October 31	2.13	1,026
November 27	2.19	2,400

a) For each of the above dates, calculate the intrinsic value and the time value of the option.

b) If the price of diesel fuel remained below $2.16 per barrel through November, calculate the effect on earnings traceable to the hedge.

Reference no: EM1310845

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