Reese Insurance company sold a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasury bond futures is 97-14. At this time, the option was exercised as the buyer closed out the position by selling an identical futures contract. Reese's net gain from selling the call option is $. A) 2,687.50
B) -2,687.50
C) 2,375.00
D) 7,437.50
E) none of the above

C) 2,375.00

Explanation:

The computation of the net gain from the selling call option is shown belwo:

We assume the par value be $100

And, the size of the contract be $100,000

Now the number of treasury bond would be

= $100,000 ÷ $100

= 1,000

And, the quotation of the price is 32

Now the call option exercise price is

= 92 - 10

= 92 + (10 ÷ 32)

= 92.3125

Call option premium is

= 2 - 24

= 2 + (24 ÷ 32)

= 2.75

Treasury bond on expiration is

= 97 - 14

= 97  + (14 ÷ 32)

= 97.4375

Now net profit per bond is

= ($97.4375 - $2.75 - $92.3125)

= $2.3750

Now the gain would be

= $2.3750 × $1,000

= $2,375

Hence, the correct option is c.

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