1. This question involves put options on the Chicago Board of Trade (CBOT) Treasury Bond futures contract. The futures contract trades in ticks of 32 per full futures point, i.e. 1.00 = 32/32. The options contract, however, trades in ticks of 64 per full futures point, i.e. 1.00 = 64/64. An options tick is simply half the value of a futures tick. Both contracts have a multiplier of $1,000, therefore 1/32 = $31.25, and of course, 1/64 = $15.625.

December Bonds are currently trading at 129.26 (12926/32), and the December 129 puts are currently trading at 0.58 (58/64). (A 129 price for bonds is possible during a flight to quality.)

(a) What is the value of the December 129 put?

(b) If you buy one of these puts at the current market price, what is your break-even level

(c) What is the maximum amount that you can gain?

(d) What is the maximum amount that you can lose?

(e) If you sell one of these puts at the current market price, what is the potential effective purchase price of the December futures contract at expiration?