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for the interest options i understood all calculations , but i dont understand the net cost in the examiners answer ?
if strike rate is 95.50and if interest rate increase ,the model answer gives 560910 , but when add the figures up i get 565110(i have added the premium)
and if interest decrease ,the model answer and my answer are both the same which is 458010
if striek rate is 96.00
if interest increase ,the model answer is 533610 , i get 642810 if i add the premium , and 453390 if i deduct the premium of 94710
if interest decrease , the model answer is 483210, the model answer and mine are the same which is 483210
can i have the explanation for both strike prices when interst rates goes up ? my calculations arent adding up and i have always added the premium for all the caluculations,,,,,,
AND ALSO ANOTHER QUESTION , FOR BORROWING WE ALWAYS ADD THE PREMIUM RIGHT? AND LENDING WE DEDUCT THE PREMIUM INORDER TO GET THE NET COST … RIGHT ? or wrong?
Why are you adding them up???
The interest is a cost, the gain on options is a receipt, the premium is a cost.
So the total is 493,500 – 2,100 + 69,510 = 560910.We always add the premium to the cost – we have to pay the premium (whether we are borrowing or lending)!
Do please watch my free lectures on interest rate risk management.
i watched your lectures , but i just forgot to think that the gain is a reciept .
thank you very much
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