Use the following information on 13-week T-bill rate options to answer the following question(s).

-Refer to CBOE.If you used the OCT 35 option to hedge rising rates,and the yield to maturity (YTM)on 13-week bills is 3.75 percent at the option's expiration,what is the outcome of your hedge?

Question

Use the following information on 13-week T-bill rate options to answer the following question(s).
 
-Refer to CBOE.If you used the OCT 35 option to hedge rising rates,and the yield to maturity (YTM)on 13-week bills is 3.75 percent at the option's expiration,what is the outcome of your hedge?

Quizplus · Accepted Answer

According to the table provided, the OCT 35 option has a premium of $1.30. Assuming one contract is purchased, the total cost of the option would be $130 (since one contract covers 100 shares). If the YTM on 13-week bills is 3.75% at expiration, the option would be in-the-money, with a value of $500. Subtracting the premium of $130, the profit per contract would be $370. However, since the question asks about hedging, the profit would be used to offset losses from rising rates. Therefore, the net profit of the hedge would be $370 minus the amount lost due to rising rates. Since the question does not provide information on the magnitude of rising rates, it is impossible to calculate the exact net profit. However, since the only answer choice that represents a positive net profit is B ($130 per contract), that is the best choice.

Use the Following Information on 13-Week T-Bill Rate Options to Answer