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Dear John,
I was working through the Dec 2015 hybrid question 2(b) and couldn’t understand how the examiner got the Unexpired basis. The basis has been divided by (1/4). However, there is no information in the question to suggest that now is 1 September.
To quote from the scenario,
“The most significant transaction which Massie Co is due to undertake with a company outside the Armstrong Group in the next six months is that it is due to receive €25 million from Bardsley Co on 30 November. Massie Co’s treasury manager intends to invest this money for the six months until 31 May….”
Please advise.
Thanks
The first line of the question says that today is 1 September. Part 2(b) is dealing with the same business and so 1 September applies throughout the question.
“now” is 1 September. December futures finish on 31 December, which is 4 months from ‘now’.
They will get the receipt on 30 November and so this is when the futures deal will be closed. From 30 November to 31 December is 1 month.
So the unexpired basis will be 1/4 of the current basis ‘now’.
My free lectures on interest rate futures will help you with this.
Hi, can you please do the calculations of what happens in the loan actual interest rate
and exercising of option we bought first and then have to settle along with premium which was payable immediately…ThanksI am not sure what you are asking for, because the examiners answer shows the calculations of what happens.
Have you watched my free lectures on interest rate options?
yes i understood that part but can you explain the collar bit of the question? how we made the loss on exercising the put option …is it not the profit ??because we only exercise the option if it is profit making not loss making (96.50-95.74/400) multiply by 50 contracts multiply by 1 million =95000
By buying a call option they will be limiting the maximum interest rate, and will therefore exercise it if the actual interest rate is higher.
If they sell a put option, then it is not the company who has the right to exercise, but the person who bought the put option from them. The put option will limit the minimum interest rate and if the actual interest is lower then the person who bought it will exercise it and the company will have to pay them the amount.
My notes on collars should help you – you can find it here:
https://opentuition.com/articles/p4/interest-rate-collars/interest rates increase to 4.1%
meaning the company bought floor to guarantee a minimum interest rate i.e @ 3% so interest rate is now 4.1 so why would i go with option so i lapse it because i am getting more interest.
On the other hand as we are writer of the put option and are recieving premium from the person buying it.The Holder is in trouble so he exercise his right so we end up paying 95000…is my assessement correct?interest rate decreases to 3.1%
here Company is still getting more so company will not exercise the right of 3 percent.
also our holder of put option will not exercise his option as he is paying less interest i.e 3.1% compared to exercise price of 3.5%
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