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Can u tell me please about the calculation of Collars? i mean what to add or what to subtract and why we are making such additions or subtractions.(like subtraction of put option premium)
Assuming that we are borrowing money, the we can fix a maximum interest rate by buying a put option (and we will have to pay the premium for the option which we can get from the table).
If we are prepared to accept a minimum interest rate, then we can achieve this by selling a call option (and therefore receiving a premium as per the table).
It is obvious why we might want to fix a maximum interest rate – the downside it that we are having to pay the premium.
If we are prepared to accept a minimum interest rate, we can still limit the maximum, but the net cost will be lower.
We pay the premium to buy the put option, but we receive the premium from selling a call option. So the net cost is the premium for the put, less the premium for the call.You can find an example of this in the Course Notes and my lectures that go with them.
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