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Sorry, but there is one more confusion.
How to find strike/exercise price in Interest option?
Will it be 100 – (current libor)
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.
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.
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.
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?
@azinbu, Yes – it is because the decision has to be made ‘now’.
arent there lectures on forex swaps and interest rate swaps?
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?
@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).
@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
@htung00, Good point – I will have to think about it. In theory you could buy back the options though.
Very helpful. Thanks a lot.
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?
It stops at the minute 7.27
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
did you succeed in June or you have to retake it?
Now in December it will be my second attempt…
the June exam was really tough, or i was not prepared enough…
Good Luck to you!
this was an eye opener to me on the points i was missing especialy on whether to buy/sell futures & option contracts
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