Final answer:
The long position payoff at expiration for the given put option on a bond is $0, since the option is in-the-money but the holder will not exercise it because the bond price at expiration ($0.95) is higher than the exercise price ($0.85), resulting in no intrinsic value.
Step-by-step explanation:
The long position payoff at expiration for a put option on a bond, where the underlying bond is at $0.95 per $1 par at expiration, the contract size is on $100,000 face value bonds, and the exercise price is $0.85, can be calculated as: The put option is in-the-money as the underlying bond price ($0.95) is less than the exercise price ($0.85). The intrinsic value per $1 par value is the exercise price minus the bond price at expiration, which is $0.85 - $0.95 = -$0.10.
However, since the bond's price is below the exercise price, the holder of the put option will not exercise it and the payoff will be $0. Therefore, for a contract size of $100,000, the payoff is the intrinsic value per $1 par value multiplied by the total face value of the bonds, which is -$0.10 * 100,000 = -$10,000, but since the option is not exercised, the payoff at expiration is actually $0.