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Mr. Moffat,
Thank you for all these lectures. I have been practicing a December, 2008 question named “phobos”. The company is based in the UK and has a borrowing requirement of 30m pounds and the options are also quoted in pounds. The kit and paper suggested the company buy a put option but i can’t see the logic in this. Can you clarify please?
Wouldn’t the call option fix a rate now?Neither put or call options fix an interest rate – the fix a maximum or a minimum.
If you are borrowing and wish to fix a maximum rate then you will always buy a put option.
(It is because if interest rates go up – which means paying more interest on the loan – then futures price will fall. By having the right to sell at a fixed price you can make a compensating gain by buying futures at the lower price and selling them at the exercise price.For more explanation, and examples, you should watch the free lecture.
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