Vince, a speculator, expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 95-32. The premium paid for the put option is 2-36. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 93-22. Vince exercises the option and closes out the position by purchasing an identical futures contract. Vince's net gain from this speculative strategy is $____.

Question

Quizplus · Accepted Answer

The correct answer is A. Vince's net gain from this speculative strategy is $406.25.Explanation:The put option gives Vince the right, but not the obligation, to sell the Treasury bond futures contract at the exercise price of 95-32. Since the price of the futures contract is currently 93-22, Vince will exercise the option and sell the contract at the higher price of 95-32.The premium paid for the put option was 2-36, which is $236.25. When Vince exercises the option, he will receive the exercise price of 95-32, which is $9,532.50. He will then need to purchase an identical futures contract to close out his position, which will cost him the current market price of 93-22, which is $9,322.50.Therefore, Vince's net gain from this speculative strategy is:$9,532.50 (exercise price) - $236.25 (premium paid) - $9,322.50 (cost to close out position) = $406.25

Vince, a Speculator, Expects Interest Rates to Increase and Purchases