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q2 of mock of exam 3 ,in collar rate calculation why its a loss on exercise ? is it because we aren’t selling put option and counterparty is doing it & to us ,we aren’t exercising call hence no loss/gain ? hypothetically if we could have exercised call option, then would it be a gain ?
I assume that you are referring to the mock exam in the BPP Revision Kit?
(In future do say so, because other people need to get the benefit of answers, not only you 🙂 )It is the people we sold the put option to who will exercise it (because they make a gain) and therefore we make a loss.
We are always able to exercise the call option that we bought (there is nothing hypothetical about it). But we will not exercise because we would make a loss on it.
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