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ACCA P4 Interest rate options (2)
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I am only one who counted 48 days from the 13th of August to 30 September?
Good heavens – this is P4 and do you really think anyone is bothered about a 1 day difference??? Especially when we calculate the basis to only 2 decimal places and the answer is only an approximation anyway (because of the assumption of linearity)!
It is completely irrelevant.
Hi Sir, thank you for your lecture. There is 1 question that I would like to ask. What if the futures price for 13th August is not given, is there another approach to answer the question?
Hi John,
If we were asked to calculate the hedging efficiency for this type of hedge would it be:
34,875-7,125/400,400 x 100% = 69.3%
or would we ignore the cost the premium:
34,875/400,400 x 100% = 87.1%
Many thanks,
Chris
You wouldn’t be asked for the hedging efficiency 馃檪
How do we know which option to use when we are given different rates. The model answers calculate all the outcome of all the rates. Is that how we should do them?
There is no ‘best’ strike price and so ideally you should show the calculations for all of them.
Another great lecture sir. I would like to ask if interest rates fall below the interest rate of the option ie below 5.75, what then would happen? Would the option be sold at the end of September?
If the interest rate fell then you would just ‘throw away’ the option. Nobody would buy it from you because it would not be worth anything.
Buying an option is a bit like paying for insurance. If the interest rate goes up then you are protected (you would exercise the option) but if the interest rate goes down then you don’t use the option but pay less interest. To get the benefit of the protection you have to pay the premium at the beginning.
Understood sir 馃檪
You are welcome 馃檪
Good morning,
Please under interest rate collar what is the bases for selecting the strike price to the used for the put and call option
It depends whether you are borrowing or depositing, and what strike prices are available. There is no ‘best’ combination for a collar – the more you restrict the difference, the lower the net premium will be.
Do read my article on collars:
https://opentuition.com/articles/p4/interest-rate-collars/
Dear sir,
thanks for your clear lecture. I am not sure why we sell at strike price because this is put option. Do i miss something?
Best Regards
A put option is the right to sell a future at a fixed price (the strike price). So exercising it means buying the future at whatever the price happens to be, and immediately selling it at the strike price.
Hi there – thank you so much for these lecture. It’s really top quality. I’m just struggling with one aspect when calculating the premium on Interest Rate Options. I understand all components except for the dividing by 400. I would understand if it was just divided by 100 – and I appreciate the fact that you say it’s ALWAYS divided by 400 but why? I assume it’s related to the fact that we’re dealing with 3-month interest rate futures – is it because the premium is quoted as an annual price and needs to be divided by 4?
I do explain this in my lectures. You divide my 100 because it is a %, and you divide by 4 because they are three months futures.