Part 2: Interest rate options Below are snippets of the September 2013 option Eu

Question

Part 2: Interest rate options

Below are snippets of the September 2013 option Eurodollar quotes (notice the first set of quotes is for calls and the second is for puts). Note that on the date of these quotes, the Eurodollar future is quoted at 1.30170 or 130.170% of the contract size, which is $1 million. The option prices in these quotes are given as % of $1,000,000. For example, the cost of the 1165 Call option = .1513% of $1,000,000 or $1513.

Use these quotes to compute the profit or loss on the following option positions ifwhen the options expire, the Eurodollar is quoted at 1175 or 117.5% of $1 million. In all cases, you are computing the profit or loss for ONE CONTRACT assuming that the option was purchased (or sold) at the

Explanation / Answer

1.You buy a 1165 call

Profit on Call Option = Notional*Max(closing-Strike,0)-premium

Profit on Call Option = 1000000*Max(1175-1165,0)-1513=$9998487

2. You buy a 1165 put.

Profit on Put Option = Notional*Max(Strike-closing,0)-premium

Profit on Put Option =1000000*Max(1165-1175,0)-4.5=-$4.5

3. You buy a 1190 call.

Profit on Call Option = Notional*Max(closing-Strike,0)-premium

Profit on Call Option = 1000000*Max(1175-1190,0)-1300=-$1300

4. You buy a 1190 put.

Profit on Put Option = Notional*Max(Strike-closing,0)-premium

Profit on Put Option =1000000*Max(1190-1175,0)-7=$14999993

5. You sell a 1195 call.

Profit on Call Option = -Notional*Max(closing-Strike,0)+premium

Profit on Call Option = -1000000*Max(1175-1195,0)+1259=$1259

6. You sell a 1195 put.

Profit on Put Option = -Notional*Max(Strike-closing,0)+premium

Profit on Put Option =-1000000*Max(1195-1175,0)+10=-$19999990

7. You sell a 1170 call.

Profit on Call Option =- Notional*Max(closing-Strike,0)+premium

Profit on Call Option =- 1000000*Max(1175-1170,0)+1469=-$4998531

8. You sell a 1170 put.

Profit on Put Option = -Notional*Max(Strike-closing,0)+premium

Profit on Put Option =-1000000*Max(1170-1175,0)+6 = $6

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