- This topic has 8 replies, 4 voices, and was last updated 6 years ago by
.
- Posts
why exercise price of 94 is preferred ?
and why choose the option rather than future as preferred method?
since, worst case rate for future is 6.58% and option is 6.63%.I also would like to know, when there are several strikes availible in the question(like in Phobos 12/08 or HYK 12/99) which strike should be selected and why?
I found in another thread that we can select an option based on the following rule:
For call option: the highest value of (interest – premium rate) are chosen.
For put option: the lowest value of (interest + premium rate) are chosen.If yes,
1)What do we mean by interest?
2) What do we mean by premium rate?
e.g. based on Phobos question for 94 put:
1) 100 – 94 = 6%
2) 0,168/400*500 000/500 000*100 = 0,042%Therefore the value would be: 6% – 0,042% = 5,958%
Please correct if I am wrong.
Thank you!)
sorry, I can not edit my above post – it seems to me above solution is not correct:
Correct solution should be:
value calculated as 6% + 0,168% = 6,168% is not it?
There is no ‘best’ option to choose – it is something to discuss in the exam.
Options fix a worst outcome, but if interest rates move in our favour then we do not exercise the option and get the benefit of the better interest rates. The downside of course is that we still have to pay the premium.
Futures, on the other hand, do not involve us having to pay a premium. However they ‘fix’ the effective rate and so although we do not lose if the interest rates move against us, neither do we gain if they move in our favour.
So much depends on which way we are expecting interest rates to move, and the exam is more about proving you know how futures and options work, and being able to discuss the effects of them. It is not a question of saying ‘this is best’ or ‘this is worst’.
- The topic ‘phobos co[dec08] choice of option’ is closed to new replies.