Series 4

Index, Interest Rate And Currency Options - Premiums Price Based Options Treasury Notes And Bonds

Treasury notes and bonds are priced as a percentage of par down to 32nds of 1 percent. Price based options are also quoted as a percentage of par down to 32nds of 1 percent.

Example:

A May Treasury bond 103 call on a 7% Treasury maturing in October 2015 is quoted at 1.16. The premium is calculated as follows:

1.16 = 1 16/32 % X $100,000

1.5% x $100,000 = $1,500

The investor will pay $1,500 for the right to purchase this 7% Treasury bond maturing in October 2015 at 103.

To determine the investor’s potential profit and loss on price based options, use the same rules that were applied to equity options. This investor will breakeven if this bond is trading at 104.16 at expiration. Priced based options settle with the delivery of the under- lying security two business days after the option has been exercised. The buyer must pay the exercise price plus accrued interest on the underlying security.

Series 4 Test Prep Material



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