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Sir, your lecture on interest rate options has really helped me. However I would like to clarify a few things
1) Does March Options on a 3-month future mean that the futures contract be completed by march?
2) If we “sell” 3-month futures today but the exercise price goes below the futures price, do we still have to “buy” the futures? Or does it simply mean that noone will buy the futures that we sold and our only payment will be the premium?1 Not quite. The option is the right to deal in March futures. If they are European style options then you have the right to buy or sell the futures (depending on whether they are call or put options) on the last day of March. If they are American style options then you have the right to buy or sell March futures at any time up to the end of March. In the exam we assume they are European style options.
2. You are confusing futures with options. If you sell futures today then you have to complete the deal at the end and buy them – whether they make a gain or a loss. (The gain or loss will be the opposite of the gain or loss on the transaction and therefore ‘fix’ the net amount). There is no premium payable on futures.
If you buy options on futures, then there is a premium payable and the options will only be exercised if there is a resulting gain.
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