Assume an insurance company purchases a call option on an S&P 500 Index futures contract for a premium of 14, with an exercise price of 1800. The value of an S&P 500 futures contract is 250 timesthe index. If the index on the futures contract increases to 1830, what is the gain on the sale of the futures contract?

Question

Quizplus · Accepted Answer

The insurance company purchased a call option on an S&P 500 index futures contract for a premium of 14. If the index on the futures contract increases to 1830 and the exercise price is 1800, the insurance company can exercise the call option and purchase the futures contract for 1800. The value of the futures contract would be 250 times the index, which is $457,500 (1830 x 250). If the insurance company sells the futures contract at this price, they will have a gain of $457,500 - $180,000 (exercise price + premium) = $277,500. However, we must subtract the premium of $14 from the gain, resulting in a net gain of $277,486. Therefore, the answer is D, $4,000.

Assume an Insurance Company Purchases a Call Option on an S&P