Reese Insurance company sold a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasurybond futures is 97-14. At this time, the option was exercised as the buyer closed out the position by selling an identical futures contract. Reese's net gain from selling the call option is $____.

Question

Quizplus · Accepted Answer

To calculate Reese's net gain from selling the call option, we need to use the formula:

Net gain/loss = Premium received - (Difference between exercise price and futures price at expiration)

Let's first convert the exercise price and futures price to decimal form:

Exercise price = 92 + 10/32 = 92.3125
Futures price = 97 + 14/32 = 97.4375

Now we can plug in the values:

Net gain/loss = 2.24 - (92.3125 - 97.4375) = -2.6875

Since the net gain/loss is negative, this means that Reese's net gain from selling the call option is a loss of $2,687.50. Therefore, the correct answer is B.

Reese Insurance Company Sold a Call Option on Interest Rate