1. avatar says

    Hi Sir,

    In the last part of the video where we calculate the prediction of maximum rate, you say that we cannot say which is the better of the two option between strike 94.25 and 94.50.

    But since we calculated that the total maximum cap. for 94.50 is 7.11% which is lower than the maximum cap. of 94.25 which is 7.34%, wouldn’t we be allowed to say that strike price of 94.50 is better since our payable of maximum interest rate is cap at a lower rate of 7.11%?

    • Profile photo of John Moffat says

      It certainly will end up better if interest rates go up.

      However, the problem is that it costs more and so if interest rates fall then we will have ‘wasted’ more money.

      Options are attractive if you think interest rates will fall, but you want protection (‘insurance’) in case you are wrong and they increase.

  2. avatar says

    Noted in a technical article on interest rate risk management a question on Titans FC that the LIBOR 6% translating to 94 and the futures price is also the same 94 on today’s date ie 15th Dec….. how can we calculate the futures price on its maturity?

    • Profile photo of John Moffat says

      In the article, the futures price is not 94 !!

      The price on 15 December of March futures is 93.790.
      So the basis is 94 – 93.790 and we assume that this falls to zero over the life of the future.

  3. Profile photo of annette says

    Wow John you are a truly gifted, you make P4 seem so easy to understand and having used F9 and passed this registered so quickly…..many thanks.

    Will you be posting lectures on SWAPS?

    Thank you again!

  4. avatar says

    In example 6 the option is exercised on 18th September. But I thought that European options can only be exercised at the end of the month they are referred to by. So how does this work in practice? Many thanks, these lectures are so helpful.

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