If you buy a European call option on Canada bonds with a strike price of 115 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 120, you will ________ the option in order to make a profit of $________.
A) not exercise; 5000
B) not exercise; 5
C) exercise; 5000
D) exercise; 5

Question

Quizplus · Accepted Answer

Since the market price of the bond is higher than the strike price, it is profitable to exercise the option. The profit will be calculated as the market price minus the strike price, so it is $120 - $115 = $5 per bond. Since options are usually exercised for a standard minimum amount, such as 100 bonds, the profit in this case would be $5 x 100 = $500. Therefore, the best choice would be to exercise the option and make a profit of $5000 (assuming a contract size of 10 options).

If You Buy a European Call Option on Canada Bonds