Horelyz & Sheyla Corporation expects interest rates to increase and purchase a

put option on Treasury bond (T-bond) futures. Assume the exercise price on T-bond

futures is $97,000, and the premium paid for the put option is $3,000.

Assume that interest rates do increase, and as a result, the price of the T-bond

futures contract declines over time and is valued at $89,000 shortly before the options

expiration date. At this time, the corporation decides to exercise the option and closes out

the position.

Requirements

1. Is there any economic (intrinsic) value in the option? Show the formula, do the

math step by step until the final result, and indicate the unit of measurement in

dollar amount.

2. Is the option in the money, at the money, or out of the money? Explain.

3. Calculate the net profit expressed in dollar amount. Show the formula, do the

math step by step until the final result, and indicate the unit of measurement in

dollar amount.

4. Will you exercise the option? Explain.

5. Calculate the overall financial return, expressed in percentage terms, on the total

capital invested. Show the formula, do the math step by step until the final result,

and indicate the unit of measurement.

6. Calculate the overall financial return (percentage terms) on the option premium.

Show the formula, do the math step by step until the final result, and indicate the

unit of measurement in percent terms.

7. In case you do not exercise the option, what would the net profit be?