If you buy a European call option on Canada bonds with a strike price of 120 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 117, you will ________ the option and potentially make a profit of $________.
A) not exercise; 3000
B) not exercise; 3
C) exercise; 3000
D) exercise; 3

Question

Quizplus · Accepted Answer

Since the market price of Canada bonds is lower than the strike price of 120, it is not profitable to exercise the call option. The investor would be better off not exercising the option and saving the cost of the premium. The potential profit would simply be the difference between the strike price and market price, which is $3 per bond. However, since the option was not exercised, there is no profit made.

If You Buy a European Call Option on Canada Bonds