If you buy a European call option on Canada bonds with a strike price of 110 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 117, you will ________ the option in order to make a profit of $________.
A) not exercise; 7000
B) not exercise; 7
C) exercise; 7000
D) exercise; 7

Question

Quizplus · Accepted Answer

If you exercise the option, you can buy Canada bonds at the strike price of 110 and sell them at the market price of 117, making a profit of $7 per bond. Since options are typically for 100 bonds, the total profit would be $7000. Not exercising the option would mean you don't make any profit, as the current market price is higher than the strike price. The premium being $0 means that there is no cost to the option holder.

If You Buy a European Call Option on Canada Bonds