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October 31, 2015 at 12:25 pm
HELLO SIR JOHN
IN THIS QUESTION THERE ARE 3 STRIKE PRICES ARE GIVEN FOR PUT OPTIONS ,PRIMIUMS (NET RECIPTS)
94.25 0.19 94.06
94.50 0.21 94.29
94.75 0.48 94.27
STRIKE PRICE OF 94.50 GIVES HIGHEST NET RECIPT OF 94.29 ,WHY YOU STILL USE STRIKE PRICE OF 94.25
KINDLY EXPLAIN …I AM STUCK
John Moffat says
October 31, 2015 at 1:24 pm
Please do not type in capital letters.
The problem is that although one strike price will give the best ‘limit’ it is also has the highest cost/premium (and the option might not be used depending on what he eventual interest rate actually is).
We don’t know what the eventual outcome actually will be, and therefore we need to look at all the choices of strikes and then discuss.
November 1, 2015 at 7:29 am
sorry about that..
so please correct me if i am wrong
if there are 3 strike prices given in the exam,we must have to demonstrate maximum cap of each strike price given ! and there relevent premiums, then we chose which ever seems best and compute our answers !
November 1, 2015 at 7:30 am
November 1, 2015 at 10:25 am
Although most of the marks are for proving that you understand how options work, ideally (subject to how much time you have available) you should look at all the strike prices and then discuss.
As I wrote before, it is rare that you can say that any one of them is definitely the best (if interest rates fall and we don’t exercise the option then the one with the lowest premium would be best, but if interest rates go up then the one with the lowest maximum would be best, but obviously we do not usually know what is going to happen in the future) – it is more a question of discussing in the exam, and again proving that you understand how they work.
October 31, 2015 at 12:02 pm
do the futures price on 13 august have no use here in then??
October 31, 2015 at 1:26 pm
The current futures price has do direct relevant (because we will only deal in the futures if we exercise the option and the trade will take place on the date we exercise the option).
However, in exams we will usually need to know the current futures price (and the current basis) in order to be able to calculate what the futures price will be on the date the option is exercisable.
August 29, 2015 at 11:58 am
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%?
August 29, 2015 at 4:23 pm
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.
May 21, 2015 at 7:50 am
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?
May 21, 2015 at 10:19 am
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.
April 14, 2015 at 5:00 pm
IS THIS IT? NO MORE LECTURES IM SAD
April 14, 2015 at 5:07 pm
What more lectures are you wanting?
(and there is one more after this one on interest rate swaps)
April 15, 2015 at 8:34 am
when? I so enjoyed all the lectures if I don’t pass this exam it will be all my fault. Excellent lectures!
April 15, 2015 at 8:59 am
April 15, 2015 at 9:56 am
When? Thank You for your excellent lectures!
March 11, 2015 at 9:07 am
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!
April 14, 2015 at 5:06 pm
There is now a lecture on swaps
December 14, 2014 at 9:58 am
where can i find lecture videos for swaps
December 14, 2014 at 11:28 am
Sorry but there is not yet a lecture on swaps.
November 27, 2014 at 1:08 pm
Great lecture but I am still not clear on the basis for choosing a strike price. In exam conditions, should we just go with the strike price that has the lowest premium as a rule?
November 27, 2014 at 2:44 pm
Ideally you should illustrate for all the strike prices. If you do not have time then illustration with just one will get the majority of the marks. The main thing is to prove you know how options work.
November 11, 2014 at 8:16 am
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.
November 11, 2014 at 10:01 am
It is true that european options can only be exercised at the end of the month.
However, since they are traded options, then way it works in practice is that you sell the option
November 1, 2014 at 5:37 pm
u didnt use ref point in this example…
December 4, 2013 at 12:00 am
Question 2 of December 2013 was unbelievable! All thanks to you John Moffat, you are the best!
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