If you buy a European call option on Canada bonds with a strike price of 115 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 110, you will ________ the option and potentially make a profit of $________.
A) not exercise; 5000
B) not exercise; 5
C) exercise; 5000
D) exercise; 5

Question

Quizplus · Accepted Answer

Since the market price is below the strike price, it does not make sense to exercise the option as you can buy the bond in the market for a cheaper price. Therefore, you would not exercise the option and there would be no profit. The premium being $0 is not relevant to this scenario.

If You Buy a European Call Option on Canada Bonds