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i didnt get a reply posted two days ago…may b it didnt reach your inbox
bpp revision kit q61 awan and co
in calculation of interest rate options why its exercised when the exercise price is lower than future price? when q64 keshi co the its exercised when exercise price is higher?a few of problems i did were like interest rate option is exercised when exercise price was greater than future price! i find that it logical as gain is when we exercise it at a higher price right?
Hi John.
The ques says that awan is receiving 48 m on 1 feb. The FRA is 4.82%. When the rate increases to 4.99%, this means that awan could receive more at 4.99% but it can only get 4.82%.So awan suffered a loss of 0.17% which is why he will have to make a payment to Voklava bank.
When the rate decreases to 3.19%, there is a gain of 1.63 for awan because it will now rec at 4.82% than 3.19%(which is low). So this time, awan will rec gain from the bank.
Please tell me whether I’ve understood the concept.What would be if this was a payment case instead of receipt?
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