Suppose a call option with an exercise price of $100 for 1y / 3% coupon Australian government bonds can be purchased at $10. a) Draw the option's payoff line, indicating when the option is in-, at- and out-of-the-money and at which bond price it breaks even. b) Suppose you decided to long this option. Explain briefly in which direction bond yields need to move to make this choice a profitable decision.

Suppose a call option with an exercise price of $100 for 1y / 3% coupon Australian government bonds can be purchased at $10. a) Draw the option's payoff line, indicating when the option is in-, at- and out-of-the-money and at which bond price it breaks even. b) Suppose you decided to long this option. Explain briefly in which direction bond yields need to move to make this choice a profitable decision.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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