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Dear John,
If the company predicted there is a possibility that interest rate will be higher than 5.41%, the point at which the 94.25 option will not exercised.
How did this 5.41% rate is calculated?
Thank you!
LilyThe options will only be exercised if the futures price is more than 94.25.
A futures prices of 94.25 is equivalent to an interest rate of 100 – 94.25 – 0.34 = 5.41%
(The 0.34 is the unexpired basis as calculated earlier in the answer)
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