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Sir i was doing this question and having trouble in the last part , relating to collars, the thing is that i dont understand basically who is exercising the selling of call? Is it us or the person we sold it to?
Furthermore why the examiner has only taken one strike price for each situation of increase by 0.5 or decrease by 0.5?
We are buying put options and selling call options.
So it is we who decide whether or not to exercise the put options, and it is the person who bought the call options who decided whether or not to exercise them.
Because there are only 2 strike prices available in the question, there is only one collar that can be created.
My article on collars should help you.
Sir i cant understand one thing with the selling of the call option ,
1. If are investing and need call options how can a collar be created then?
2. Normally if we buy a call option and sell on the transaction date to make profit, how is that different from us having to sell it to someone early on from that date to make a collar
If we are investing we do not need call options at all.
We buy a put option, which limits the maximum interest rate.
That means paying a premium for the option.A way of reducing the premium is to sell a put option (because then we receive a premium, to set off against the premium we are paying) but then have to accept a minimum interest rate.
Once we have bought an option, we do not sell it. We either exercise it or throw it away.
Again I do suggest that you read my article on collars (assuming that you have already watched the free lectures on options and know how they work).
Thanks ok sir, but in your lecture u said when we Borrow we always Buy A Put so when we Invest/deposit wouldnt we buy a Call?
For currency options we look we must do with contract currency and decide a call or a put is that different from interest rate options?
I do apologise – I answered too quickly last time.
That is quite correct – when you are borrowing, you buy a put option in order to limit the maximum rate. When you are depositing, you buy a call option in order to limit the minimum interest rate.
With currency options, it is different thinking – as you have written, you buy a call or a put depending on whether you will be buying or selling the contract currency.
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