Milton Briedman, a speculator, expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 95-32.The premium paid for the put option is 2-36.Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 93-22.Briedman exercises the option and closes out the position by purchasing an identical futures contract.Briedman's net gain from this speculative strategy is $____.

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Quizplus · Accepted Answer

The correct answer is A because the net gain from this speculative strategy is $4,718.75. This is calculated by taking the difference between the exercise price of the put option (95-32) and the price of the Treasury bond futures contract at expiration (93-22), and then multiplying this difference by the number of contracts (1). The premium paid for the put option (2-36) is then subtracted from this amount to arrive at the net gain.

Milton Briedman, a Speculator, Expects Interest Rates to Increase and Purchases