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Dear tutors, in this question, While calculation Options,
after calculating the remaining basis of .09 how the examiner is calculating the expected future.
as per your lectures, the remaining basis needs to be added in the current future price. kindly guide me..Secondly ,
Lurgshall Co Counterparty Interest rate differential
Fixed-rate 5·60% 6·10% 0·50%
Floating rate LIBOR + 0·50% LIBOR + 1·50% 1·00%
Lurgshall Co has an advantage in borrowing at both fixed and floating rates, but the floating rate advantage is larger.
Bank Charges 10 Basis Each
Gain % for Lurgshall Co = 50% (1 – 0·5 – 0·2) = 0·15My question is that,
Total Differential is 1.5% from which 0.2% bank charges
rest is shared equally .065 each but answer is different why
How he is calculating the benefitFirst question:
I do not say in my lectures that the remaining basis is always added to the current futures price.
If the current futures price is higher than the current equivalent of LIBOR, then it will always be higher.
If the current futures price is lower than the current equivalent of LIBOR, then it will always be lower.
It is this that determines whether you add or subtract the basis.Second question:
The fixed rate differential is 0.5% in favour of Lursghall.
The floating rate differential is 1% in about of Lurgshall.So if Lurgshall swaps, then they gain the 1% but lose the fixed saving of 0.5%, so there is a net gain of 0.5%.
After charges this becomes 0.3% and if shared equally it is 0.15% each.
thirdly if it is not given that what would be the spot rate at transaction date then how we will calculate the expected future rate
Tell me if I am right:
-in Currency futures/option while we borrow we generally choose strategy Put Option, Sell now Buy later when contracts Size is in Home currency. But if Contract size in foreign currency the Strategy will be opposite as mention above. for borrow, we will choose Call option and for futures, we will Buy now and sell later.1. Yes – it will be the greater.
2. You use the lock-in rate as explained in my lectures (which gives the net effect of converting the transaction at spot together with the gain or loss on the futures.
3. Yes – you are right.
dear tutor if wrong option selected eg. call option instead of put whole question will be wrong or only 1-2 marks will be deducted.
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