PMT Home Assignment: Prepare for yourself, Submit on 13th Feb,2024

1. An aluminum trader assumes in November,2018 that in January2019 aluminum price will

have 60 % probability that it will be higher by 10% than in November,2018 and 40%
probability that it will be lesser than 15% in November,2018. The November,2018 price of
aluminum is $2000 per metric ton. He makes a 3-month Call and Put option choice for
strikes in January ,2019. The call option commission/premium is $20.00 per ton and put
option commission/premium is $ 30.00 per ton. The trader has $1000000.00 to take part in
the trading and allocates his call and put option purchases in a ratio on the basis of
probabilities at the January,2019 price of aluminum. He borrows the money from a lender
who charges him 2% interest per month for the money lent. As the delivery will require sea
transport he also has to buy advance insurance at a cost of $ 2.00 per option.

The January aluminum price was $2050.00 per ton. Considering the options, he has,
explain what will be the results of the choices he can make? Which option out of all
options he has, will provide him profit on the investment he makes?

2. Related to commodity exchanges explain the following:

a. Who are the commodity and commodity derivatives traded in the exchanges?

b. Explain different types of trading in LME.

c. Related to the Exchange based trading explain the meaning of the terms:

1. CIF. 2. FOB 3. Backwardation 4. Contango 5. Strike price

3. A metal buyer buys a future on these terms: 800 ton, current market price : Rs
20,000 per ton, and the premium/commission price: 2% of the total price ( non-
refundable) and the strike price: Rs.20,000 per ton. On the maturity day , the market
price of the metal is Rs.20,200.00 per ton. What the profit/loss he/she make on the
maturity date.

Now the buyer ,before purchase, asks for a revised future: 800 ton, current market
price : Rs 20,000 per ton, and the premium/commission price: 4% of the total price (
adjustable to the price at maturity) and the strike price: Rs.20,500 per ton. On the
maturity day , the market price of the metal is Rs.20,200.00 per ton. What the
profit/loss he/she make on the maturity date under the revised future ?