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Determine the net gain to smart savings bank

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Problem - Smart Savings Bank desired to hedge its interest rate risk. It considered two possibilities: (1) sell Treasury bond futures at a price of 94-00 or (2) purchase a put option on Treasury bond futures. At the time, the price of Treasury bond futures was 95-00 and their face value was $100,000. The put option premium was 2-00, and the exercise price was 94-00. Just before the option expired, the Treasury bond futures price was 91-00, and Smart Savings Bank would have exercised the put option at that time, if at all. This is also the time when it would have offset its futures position, if it had sold futures. Determine the net gain to Smart Savings Bank if it had sold Treasury bond futures versus if it had purchased a put option on Treasury bond futures. Which alternative would have been more favorable, based on the situation that occurred?

Reference no: EM132915365

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