Sally purchased a call option on Treasury bond futures at a premium of 2-00. The

Question

Sally purchased a call option on Treasury bond futures at a premium of 2-00. The exercise price is 92-08. Assume that the price of the Treasury bond futures rises to 95-08. Note that prices are quoted in 1/64th of a point.

Question 1: If Sally exercises her call option and also sells an identical futures contract at 95-08 to close out her position, what is her net gain or loss after accounting for the premium paid on the option?

Question 2: What is Sally’s net gain or loss if she lets the option expire? Explain.

Explanation / Answer

1

Excluding premium, 95+08/64-92-08/64=3 gain on call

3 gain on call-2 premium=1 net gain on call

She closes out the position

2

If she lets the option expire, she will lose premium of 2

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