Question

5. Suppose in May you purchase $100,000 face value of U.S. Treasury bonds for a price of $90,000. Suppose that the bond matures in 15 years but that you must sell them at the end of July (10 points). In the top row in the table below, report the gains or loss that you would incur for selling the a. bonds for each of the listed potential end-of-July selling prices for the bonds. b. In the middle row in the table below, report the gain or loss from purchasing a put option on $100,000 face value Treasury bond futures with a strike price of $90,000 (90 points) and a premium of 1.5 points ($1,500) with an expiration date at the end of July for each of the potential end-of-July selling prices for the bonds. In the bottom row in the table below, report the gain or loss from purchasing a call option on $100,000 face value Treasury bond futures with a strike price of $90,000 (90 points) and a premium of 1.5 points ($1,500) with an expiration date at the end of July for each of the C. potential end-of-July selling prices for the bonds. $100,000 $95,000 $90,000 $80,000 $85,000 Treasury bonds Put option Call option

Answer 1

Ans :-

	$80,000	$85,000	$90,000	$95,000	$100,000
Treasury Bonds	$ (10,000)	$ (5,000)	Indifferent	$ 5,000	$ 10,000
Put Option	$ 8,500	$ 3,500	$ (1,500)	$ (1,500)	$ (1,500)
Call Option	$ (1,500)	$ (1,500)	$ (1,500)	$ 3,500	$ 8,500

• Notes :-
  • Purchase of Put option gives right to sale at Exercise price = $90,000
  • Hence, if the Spot price is above $90,000 then the put option would not be exercised.
  • Whereas, purchasing a Call option gives right to Purchase bond at $90,000.
  • Hence, if the market price of the bond is less than $90,000 then the call option would not be exercised.
  • However, whether the option is exercised or not, we have to pay the premium for purchasing the option.