Jack purchased a put option on Treasury bond futures with a September delivery date and an exercise price of 91-16. Assume the put option has a premium of 1-32. Also assume that the price of the Treasury bond futures decreases to 88-16.
a) If Jack exercises his put option and also buys an identical futures contract at 88-16 to close out his position, what is his net gain or loss after accounting for the premium paid on the option? Show your work. Check figure: Net gain = $1,500.
b) What is Jack's net gain or loss if he lets the option expire? Explain.