Chapter 01 · Section 1.1

Watchmaker Case Study - Question 5

What happens if he does not receive the order and the price rises?

a) He no longer needs to buy the 1,000 additional ounces and will therefore not take advantage of the right conveyed by the option.
No. Although he may no longer need the 1,000 ounces he can profit by buying the gold at $400/oz and selling it at the market price (he could also profit by just selling back his options, but we'll discuss this in a later chapter.)
b) He will act exactly the same way as if he had received the order.
c) He will buy gold at $400/oz and sell it at the higher market price.
d) He will be obliged to buy gold at $400/oz.