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21 September, 09:15

Holly Kombs, a speculator, expects interest rates to decline in the near future. Thus, she purchases 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, Kombs decides to exercise the option and closes out the position by selling an identical futures contract.

A) True

B) False

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Answers (1)
  1. 21 September, 10:23
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    True, it is a valid financial operation and Holly Kombs actually made a profit from it.

    Explanation:

    When Holly Kombs purchased the call option the price of the bond was 92.10 and the call option had a premium of 2.24. When the bond finally reached a price of 97.14, holly Kombs decided to exercise her call option and bought the bonds at 92.10.
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