1. Avatar of hssniqbl says

    In this example, we were told that Agne wanted to use the strike price of 94.25. What if in exam, the question asks as to choose an option that would be most effective?? Do we solve the question by using all 3 strike prices or can we advise by calculating the maximum effective interest rate???

    • avatar says

      Choose a strike price that is close to the current LIBOR. The BPP text book says and I quote: ‘Make sure you read the question carefully to determine whether you have been told which strike price to use. If you have not been told you can choose the strike price closest to the interest rate – for example if the interest rate is 3% then you would choose an exercise price of 97.00.’ I hope this helps.

      • Avatar of hssniqbl says

        Ok. thanks. So just to be sure… SUPPOSE in Agnes example. we werent told which strike price to use, then as the current LIBOR given in the example is 5%, then we would have used strike price of 94.75, as that is closest to the current LIBOR??? Correct?

      • Avatar of hssniqbl says

        And what about Currency options?? Do we use the same point of using the exercise price nearest to spot rate or is there some other way?? In BPP book, it adds/subtracts premium from call/put option to arrive at a net and then decides which one to chose based on the most favorable.?? Thank u.

  2. avatar says

    @Johnmoffat am so thankful for providing us with these free lectures. They are sooo helpful especially here in New Zealand where we don’t have lecturers for optional papers, so these lectures are my only hope.
    I have a question concerning Q.5 of December 2008, we have been given the futures open and settlement prices. Which of these two do we use when calculating basis? I know we use the current LIBOR, but which futures price do I use, open or settlement? And why?

    • Avatar of John Moffat says

      The current basis (on 13 August) is the difference between the current spot rate, and the current price of the September future (which is 94.30).
      As the spot rate changes, so to the price of the futures – we can estimate by assuming that the basis (the difference) falls linearly.

      94.25 is an exercise price (not a futures price). All it means is that if we choose to exercise the option then we have the right to buy or sell (depending whether put or call) a future at that fixed price. We would only exercise if we would make a profit, and the profit will be the difference between whatever the futures price is on that date, and the exercise price.

  3. avatar says

    It is said in the course of lecture while counting broken period days for option that August has got 30 days. Does it mean that we have to count 30 days uni formally by taking into account 360 days in a year.. Or we have to count actual number of days in that case From August 13 to August 31 , they are coming 18 days. Kindly clarify.

      • avatar says

        Dear Sir
        My purpose was to get clarity about counting number of days. It is very good lecture.
        You are doing very nobal job in making available such a quality stuff at free of cost across globe.
        God bless

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