Hedging: Profits and Losses
Treasury bond is one of the marketable, fixed-interest debt security utilized by the U.S government holding a maturity of approximately ten years or more. These securities often allow the investors to make payment on interest accrued semi-annually. However, only the federal government has the power to tax the income earned from treasury bonds by various stakeholders (Baldwin, 2011). One of the conventional means of transacting in treasury bonds is through buying calls. An entrepreneur who purchases a call assumes the existing price of the stocks will increase and therefore gain profits from the predicted value in the future. Additionally, an investor can have control over the underlying bonds and earnings from its obligation though limiting their loss to the premium that the entrepreneur paid for a call. One of the advantages of purchasing calls is that it allows an investor to maximize their influence and control as well as achieve more considerable percentage revenue made on the investment over a given period. Nonetheless, investors who hope to have funds in the future may use the strategy of buying calls in a bid to lock in a buy expense for security (Christensen, Lopez & Shultz, 2017). When considering the option to buy an investor should contemplate on three major factors that will determine their success. These factors are the maximum gain obtained, possible maximum loss, and the break-even point.
When a stakeholder gets an extended call position, they have an unlimited maximum gain on the possible asset or security. Thus, they receive benefit from the increase in the prices of the stocks. Given that the stock prices lack a limit on the range of rising, they have an unrestricted gain. Whenever an entrepreneur has stocks, they receive loss restricted to the figure they invested. If an investor buys a call option, the amount paid is often going to be their maximum loss.
In relation to this, the paper focuses on calculating the amount spent for a particular call in dollars when the strike price is 11000. Besides, the writer will determine the profit and losses an investor can gain from purchasing a call on June 10 using Exhibit 8-4.
Question 1.How to Determine the Price to Pay for a Given Call
Scientists have established the most appropriate models and concepts that can support all the financial analysts and investors to evaluate the value of a call option. Unfortunately, investors cannot decide how much they can pay for a call option listed. The market supply and demand dynamics are responsible for the cost of each option as well as the best possibility at the prevailing price. Given a strike price of approximately 11000 (April), and having an underlying rate $25 per share, the pay for a call will be:
The premium quote for the May call is 18. Given that, the underlying futures contract pricing has an index point that will be equal to $25; therefore the premium quote becomes $450 (18 basis points x $25). For as low as $450 an investor can buy the right of one US dollar contract. If the strike price is 11(000), then they will receive $1600 (64 basis points x $25) at the time that call is bought. The premium quote for the June call is 19. The underlying contract future price has an index point that equals to $25; thus, the premium quote will be 475 (19 basis points x $25). For as low as $475 a stakeholder can purchase the right of one US dollar contract. The strike price is 11(000), then they will be $1600 (64 basis points x $25) at the time the call is purchased.
September calls
The premium quote for the September call is 34.5. The underlying contract future price has an index point that corresponds to $25; therefore the premium quote will be 862.5 (34.5 basis points x $25). Hence, with $862.5 shareholders can buy the right of one US dollar contract. The strike price is 11(000), they will be (64 basis points x $25) at the time the investor bought it.
When an investor desires to buy a call, it is essential to determine where the price of the stock will be at expiration in a bid to establish the point of break-even on the trading (Bulter, Livingston, & Zhou, 2014). A businessperson who has bought calls has just paid the premium to the broker hoping that prices of the stocks will rise in the future. In this case, an entrepreneur with $1600 can pay for either May, June or September calls.
Based on the question, the amount paid in dollars if the strike price of 11000 is chosen would be: Price per call = 7.96875 * 1000 = $ 7968.75
Question 2, How to Sell a Call Option
The maximum gain, loss or the point of breakeven can help an investor to sell back their call options in the security market. Call options often give the holder an opportunity as well as the right to sell an underlying asset at the strike price. The federal law requires and mandates the seller of the stock to offer it at the strike price. A businessperson who decides to sell their call hope that the underlying cost of $25 per share is likely to decline in the future and therefore they will have the ability to profit because of the fall in prices of stocks by selling their calls. However, an individual who considers selling their call options is required to provide the underlying stock if the purchaser decides to exercise it. The table below shows the connection between the call seller and buyer.
Call Buyer Call Seller
Maximum Gain Unlimited Premium Received
Maximum Loss Premium paid Unlimited
Breakeven Strike price + Premium Strike price + Premium
Wants option to Exercise Expire

Table 1.0: Relationship between call seller and buyer
Considering selling the call previously bought on June 10, the amount of profit or loss is calculated as follows.
The selling price of the call would be calculated through: 4.484375 * 1000 = $4,484.375. Therefore, the unit price of a call in this case amounts to $ 4, 484.375. On the other hand, the loss on sale of the call can be calculated by subtracting the price per call value arrived at in the question above from the selling price of each call in this question. The calculation is as below: Loss on sale of the call = $4,484.40 – $7,968.75 = – $3,484.375. Thus, the resulting loss is $3, 484. 375.
At a strike price of approximately 112(00) on June 10 the seller will experience loss. From the calculations provided above, it is apparent that the buyer received a premium paid while the seller maintains a loss. Given that an option selected in the table is a two-party agreement, the maximum profits obtained by the buyer translates to the seller’s maximum loss. However, both parties can breakeven at the same point but it is not achievable in the current value. In conclusion, stakeholders will either purchase calls when they expect the share price of the underlying stock to decline or sell it when they believe it will upsurge.
 
References
Baldwin, W. (2011). Treasury’s crap game. Forbes, 188(4), 42.
Bulter, M., Livingston, M., & Zhou, L. (2014). A long-term perspective on the determinants of treasury bond stripping levels. Financial Markets, Institutions & Instruments, 23(4), 179-210.
Christensen, J. E., Lopez, J. A., & Shultz, P. (2017). Do all new treasuries trade at a premium? FRBSF Economic Letter, 2017(3), 1-5.