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Hello,how did you get 1.0145 because i got 1.45% and divided by it but no via 1.0145?thank you

Just as to add on interest at 1.45% we multiply by 1.0145 (i.e. 1+r), to ‘remove’ interest at 1.45% we divide by 1.0145.

It is the same logic as discounting and if you are still unsure it will help you to watch the Paper MA (was F3) lectures on interest and discounting.

I get the logic,thank you.

You are welcome 🙂

Hi sir, regarding to final amount received on deposit, aren’t we only receive the interest since we are repaying the loan using our principal? Instead of receiving GBP 3,223,709 of principal + interest, shouldn’t we only receive GBP 28,754 (GBP 3,194,954*0.009)?

Thanks.

We are not repaying the loan using our principal.

We are repaying the loan using the money that is received in 3 months time.

I do suggest that you watch the lecture again (and maybe the relevant FM (was F9) lectures, because money market hedging is revision from Paper FM).

In Example 6

It is said that Current 3 month interest rates: US prime 5.2% – 5.8% and

UK LIBOR 3.6% – 3.9%, so why we should divide them with 12 and multiply with 3?

Because interest rates are always quoted as yearly rates (as is the case in real life, and as was the case in Paper FM (was F9)).

Ok, it just in the example were stated that are given 3 month interest rate.

Also is it true that the cost of an interest rate floor is higher than the cost of an interest rate collar?

Always the interest rates are given as yearly rates. The yearly interest rate will be different for different lengths of depositing or borrowing – so a rate for 3 month deposits will be different that the rate for 1 month deposits, but they will both be quoted as annual rates.

You can’t compare a floor with a collar. However the whole point of creating a collar is to reduce the net premium cost of just having a cap (if borrowing money) or just having a floor (if depositing money).

Hi, interesting lecture.

So the final deal is at an effective rate of 1.5510, i.e., .84 disc