Question

A commercial loan officer has made a commitment to one of her best clients to make a $100,000 loan in 3 months at today's rates. She thinks that rates would rise and she would therefore miss the opportunity yo charge higher rates. She decides to hedge against this by buying a put option on 1 T-bond Futures contract with a face value of $100,000 and current price of 97-16/32. The put option strike price is 97-12/32 and its price is $2,000. Calculate the gain/loss on the hedge itself if

(a) interest rates decrease and T-bond Futures rise to 99

(b) interest rates increase and T-bond Futures fall to 95-28/32

(c) interest rates increase and T-bond Futures fall to 94

Answer 1

1.
=MAX(97+12/32-99,0)/100*100000-2000=-2000

Loss of 2000

2.
=MAX(97+12/32-95-28/32,0)/100*100000-2000=-500

Loss of 500

3.
=MAX(97+12/32-94,0)/100*100000-2000=1375

Gain of 1375