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Hi John,
Examiner seems use different way to calculate the option basis, and I don’t quite understand his idea. 1/4 x0.64=0.16, then (100-3.1) -0.16=96.74. I don’t know where 1/4 is from, why need to -0.16 to get future price?
According to your lecture, Massie will receive fund in 6 mths time on 30/11, so it is 31/5 now. Dec futures date 31/12, there are 7 months, I month between 30/11 to 31/12. hence the calculation should be 1/7×0.64=0.0914, libor drop to 3.1,100-3.1=96.9. The futures price should be 96.9-0.0914=96.81, gains on basis =96.81-96.5=0.31, which is 31ticks.
Can you please tell me what mistake I’ve made, the time? Although in part A it says “today is 1/9”, but in part B it also says Massie will receive money in 6 months time, very confusion.
The question does not say that it will receive the money in 6 months time. It only says that it is the most significant transaction during the next six months.
It then says that it will be received on 30 November.
Since today is 1 September, it will be received in 3 months time. December futures finish in 4 months time. So there is 1 month unexpired.
Examiner always give two strike prices in the question and his answer also include both strikes. Do I need to calculate options with both strike prices, or I can choose one only, what’s the rule to choose the strike? If I choose the strike that close to future price, then interest rate 4.1% and 3.1% will have different strike price, is it OK? Thanks.
Hi John, sorry to bother you again. I attempted this whole questions 2 (a+b) again, It took me almost 1.5 hours. especially part B, two interest rate, two strike price, and collar. It’s impossible to complete all within 45 mins. Do I need to write so much as examiner’s answer?
Can you please give me some advise? Thanks.With regard to strike prices, ideally you should show the calculations for all those available. (There is no ‘best’ strike price because options giving a better limit will have a bigger premium (and the premium will still be payable even if the option is not exercised)).
However, the examiner is more concerned that you prove you know how options work, and so if you are short of time just illustrate one strike price in full but mention that others are available. That will get you more than the half marks you need to pass.
The examiner always writes much more in his answers then he expects from students – it is because he knows that people learn from his answers. You are not expected to write so much 🙂
Nobody will finish P4 – don’t worry. What is most important is that you do something (however little) for every part of all the questions. That way you will get the 50% that you need 🙂
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