The buyer of a bond call option stands to make a positive payoff if changes in market interest rates cause the bond price to rise above the exercise price.

Question

Quizplus · Accepted Answer

When a buyer of a bond call option exercises the option, they are essentially buying the underlying bond at the exercise price, which is usually lower than the current market price of the bond. If interest rates rise and the bond price increases, the buyer of the call option can profit by selling the bond at the higher market price. Therefore, they stand to make a positive payoff if changes in market interest rates cause the bond price to rise above the exercise price.

The Buyer of a Bond Call Option Stands to Make