Comments

  1. avatar says

    Very nice lecture.
    My only doubt is that it was told in the course of lecture that August has got 30 days so while counting days from August 13 it was taken as 17 days for August + 30 days for September.
    On this background
    1) Since August has 31 days actually but for the sake of calculation should we be presuming that Year has got 360 days and every month ( including February) has got 30 days invariably
    2) If not by taking into account actual number of days in August it becomes 18 days in August + 30 days in September.
    Can you kindly throw light on this.

  2. avatar says

    Very nice lecture. Only one doubt -it was said during the course of lecture that while counting days for August that August has 30 days so remaining days in August being 17 + 30 for September. My doubt is
    1) Should we be assuming 360 days in a year and uniform 30 days in every month while counting the days for Interest Rate Options. or
    2) We have to take actual number of days in that case it would have been 18 days in August from August 13 , leaving 13 and counting remaining 18 days.
    Please throw light on it.
    Apart from this excellent lecture. God bless.

  3. avatar says

    Sorry, but there is one more confusion.
    How to find strike/exercise price in Interest option?
    Will it be 100 – (current libor)
    Or
    It will be 100 – (maximum borrowing rate borrower is ready to pay)

    In examples we took exercise price as 94.25 (100-5.75)
    But in December 2008 question of PHOBUS CO. exercise price is not 100-6.6.

  4. avatar says

    I’m a bit confused. In last lecture we estimated future price by subtracting future interest rate from 100, that was 85(100-15).
    Why don’t we do the same in this question? Why can’t we calculate future price by subtracting LIBOR of 6.5% from 100 to find the future price.
    I mix both the methods. Kindly tell me when to use which one.
    Thank you.

    • Profile photo of John Moffat says

      The previous question was a ‘baby’ example to explain the principle.

      In practice the futures price will not be ‘perfect’ – i.e. it will not be exactly 100 – the interest rate. The difference between the actual futures price and the ‘perfect’ price is the basis risk – we assume that this difference falls to zero by the end of the future.

  5. avatar says

    Hi thanks for such a clear lectures! but i have one question
    As the cost of selling additional contract is less than benefit from this contract on 18 September, why should we limit the number of contract to 30?
    Is it becouse we take this desicion on 13th of August?

  6. avatar says

    For example 7 of this chapter it asks to how Agne could use a collar to hedge.

    How is the hedge effectivness calculated if we’ve sold september call options that are exerciseable upto September 30 and our own transactions end on September 18.

    Is the hedge efficieny and effective interest rate only calcuable until after September 30 when the options expire?

    • Profile photo of John Moffat says

      @htung00, If the options are American style, then they can be exercised at any time up to the end of the relevant month. If they are European style then they can only be exercised at the end of the month (but they could be sold earlier at whatever the price happened to be on the date of sale).

      • avatar says

        @johnmoffat, in example 7 we bought put options and sold call options to create a collar. With the put options we can sell them anytime, but my problem is with the call options we sold.

        They once sold we have no control of when it is exercised we where able to calculte the profit from selling the put options on 18 sept but we still wouldn’t know the complete effect of the call options as there is still oppurtunity for loss until sept 30

  7. avatar says

    lectures on int rate risk mgmt were very helpful to me cuz i had no access to physical tutor in town. Thanks OT.

    I’ve a particular question on this Int rate option (2) lecture. In the end, lecturer says its hard to decide amongs strike prices 94.25 and 94.50. I understood the calculations but what’s the logic in avoiding selecting the best strike price. Can anyone tell me?

  8. Profile photo of goodnewskydzramedo says

    i actually now get the reasoning behind futures and options. i am pretty sure it would be one of my questions to answer should it show up in the exams

    I am predicting international investment appraisal to be there as it’s been quite sometime now since it’s been examined. Any tips

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