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Hi sir,
In the above question in the interest rate collar if the interest rate decreases to 3.3% they have calculated in the answer scheme using the percentages and arrived at the figure of 4.173%
However they’ve mentioned full credit will be given to answers using dollar value and got the resultant effective rate but haven’t given the solution.
I did the working using the dollar value and I got a rate of 4.92% (considering 576 contracts which is also given full credit)
So what I would like to know is why is there this much of a variance between the two and I’ve based my evaluation using the figures I’ve arrived at.
So in this case 4.35% was the comparative other figure so based on my calculation 4.35% would’ve been better off however based on the answer 4.173% is clearly better
My question is if I had done the calculations correctly and my evaluation is based on my figures do I get the Mark’s for my commentary and discussion?
Also if you have done the answer using dollar figures and 576 contracts what answer would you have gotten, if you had done it that way just to check whether my calculations are correct.
It’s a pretty long query, I’m sorry about that. Also want to thank you for your commitment and dedication towards helping all the students. May god bless you all
Thanks in advance 🙂
I am a little surprised that there is so much variation, but it is possible.
Certainly, whether your calculations were correct or not you would still get full marks for the correct discussion or commentary on the figure that you arrived it. You never lose marks twice for the same mistake – always, whatever the topic, the discussion marks are for a sensible discussion based on the figures that you calculated.
If you want to me to check your calculations then write them down and I will look through them 🙂
When the rate decreases to 3.3%
Number of contracts = 48000/1000*(36/3) = 576
Exercise price = 96.25
Futures price = 96.61
Pay to counterparty = 0.36Put premium = 0.211
Call premium = 0.198As per my calculation
Loan interest = 48000*(3.3+0.5)%
Put premium = 303.84 = 576*1000*(0.211/400)
Call premium sold = -285.12 = 576*1000*(0.198/400)
Paid to counterparty = 518.4 = 576*1000*(0.36/400)Net payments = 2361.12
Effective rate = 2361.12/48000 = 4.92%
As per marking scheme
Loan cost = 3.8% (3.3+0.5)
Paid to counterparty = 0.36%
Premium = 0.013 (0.211 – 0.198)Effective interest = 4.173%
Your workings do appear to be correct, and you would therefore get the marks.
Obviously it will change any comments/discussion, but as I wrote before that is not a problem fr the marks 🙂
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