Brad expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 97-00. The premium paid for the put option is 3-00. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 89-00. Brad exercises the option and closes out the position by purchasing an identical futures contract. Brad's net gain from this speculative strategy is $____, and his return on his investment is about _______ percent.

Question

Quizplus · Accepted Answer

The net gain is calculated by taking the difference between the exercise price and the futures contract price at expiration, then adjusting for the premium paid. The exercise price is 97-00, and the futures contract price at expiration is 89-00, so the difference is 8-00. Since each point is worth $1,000, this difference represents a gain of $8,000. After subtracting the premium paid for the put option (3-00 or $3,000), the net gain is $5,000. The return on investment is calculated by dividing the net gain by the premium paid: ($5,000 / $3,000) * 100 = 166.67%, which rounds to approximately 167%.

Brad Expects Interest Rates to Increase and Purchases a Put