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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Troder J03
i refer to BPP answer, part B(ii) maximum return is $7,175,000
however, i wanna try and check whether the maximum return is $7,175,000.
so i assume the LIBOR on october is 6%, estimated December future is 94.125 (basis risk 0.125),
i get the following answer:
actual interest received 400mx5.75%x5/12 = 9,583,333
net premium paid = (325,000)
loss on option (95.25-94.125)/400 x 400m x 5/3 = (1,875,000)
Total receipt is $7,383,333 which is more than 7,175,00.
and again i tried if the LIBOR is 7%, it also give me the same answer $7,383,333.
however, if LIBOR is 1% or 2%, i can get the answer $7,175,000.
i dunno what wrong with my calculation.
But you do not know what the current futures price is, and so you cannot estimate the basis risk and therefore futures price at the date of the transaction (and the options are options to deal in futures).