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Sir just want to know that how we decide which strike price to choose for interest collar
I now that when int rate falls by 0.5% option at 96.50 strike will be exercised for call option
But for collar i had to buy put but at what strike 97 or 96.50 which to choose how I determine which strike price will be rite to choose for collar.
There is no ‘best’ combination of strike prices when creating a collar.
Different strike prices will results in different maximum and minimum interest rates, but the net premium will change accordingly (and the premium might be ‘wasted’ if either of the options is not exercised).
Ideally you would show the results for all possible collars. However in the exam most (if not all) of the marks are for proving that you know how collars work. So unless you find you have plenty of spare time (which is unlikely!!) you should show one collar in full, but then just write that other collars are available.
Have you read my article on collars? It is linked from the main P4 page.
- The topic ‘Q2 Sep/Dec 2015’ is closed to new replies.