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    • Maybe sometime I will record one, but there are no techniques involved that are not covered in the earlier lectures.
      In addition I have recorded several lecture working through past exams questions on this (you can find them linked from the main P4 page as ‘P4 revision and past questions’.)

  3. Thank you for your lectures, they help me a lot! Watched all of them for p4
    I have the question about effective interest rate on interest rate options in the example 6.
    when we calculate it we add premium to the paid amount of interest and to the gain from the option. However we paid premium in advance on ?ug 13, and other amounts on Sept 18.
    Shouldn’t we consider time value of money for the premium, and use its NPV on Sept 18, to calculate effective interest rate? e.g. 7125*(1+r)? Thank you!

  6. Thank you a lot for your lecture

    I have one question, though.
    How was it possible to exercise the put option on Sep 18th?
    They are quoted to mature at the end of Sep, i.e on Sep 30th.
    Or are they American type of options?

    Best regards,
    Dmitry

    • In the exam you effectively do assume that they are American style.

      (In practice, even though you cannot exercise European style options early, what you can do is sell the option which will have the same effect.)

  8. Hello
    In previous examples, when predicting the effective interest rate we added the changes in basis risk. Why do we use the premium this time?

    Why did you use the 94.25 as your strike price? If we were ask to determine the most suitable strike price how would you do this? Would you assume to take the strike price closest to the LIBOR rate on the 13/08 (ie 5%) hence the strike price closest to 95.00. Or would you take 6,4% hence the strike price closest to 93,6?

    Thank you

    • Two things.

      Firstly, we can’t predict an effective interest rate because these are options. All we can do is determine the worst interest rate we could suffer (because if interest rates moved the other way then we would not exercise the options).

      Secondly, since the premium is payable whether or not the option is exercised it makes the overall cost greater (there is no premium payable when we are simply dealing in futures rather than using options).

      Thirdly, there isn’t really any such thing as a ‘best’ exercise price. This is because although different exercise prices create different ‘worst’ outcomes, for better ‘worst’ outcomes you pay a higher premium which might end up being wasted if we do not need to exercise the option. In the exam, ideally you would calculate for all available exercise prices and then discuss (which actually does not take too long – once you have done it for one it is rather repetitive). However if you are short of time, just illustrating for one exercise price (and then discussing) would get most of the marks – the marks are mainly for proving that you know how options work.

    • I assume that you have downloaded the free lecture notes (otherwise there is no point in watching the lectures!).

      In the question is says that LIBOR is currently 5% and that Agne can borrow at 6.4%. Therefore she is paying a premium of 1.4% above LIBOR and we always assume that the premium will remain constant.

  10. HELLO SIR JOHN
    IN THIS QUESTION THERE ARE 3 STRIKE PRICES ARE GIVEN FOR PUT OPTIONS ,PRIMIUMS (NET RECIPTS)
    94.25 0.19 94.06
    94.50 0.21 94.29
    94.75 0.48 94.27

    STRIKE PRICE OF 94.50 GIVES HIGHEST NET RECIPT OF 94.29 ,WHY YOU STILL USE STRIKE PRICE OF 94.25

    KINDLY EXPLAIN …I AM STUCK

    • Please do not type in capital letters.

      The problem is that although one strike price will give the best ‘limit’ it is also has the highest cost/premium (and the option might not be used depending on what he eventual interest rate actually is).

      We don’t know what the eventual outcome actually will be, and therefore we need to look at all the choices of strikes and then discuss.

      • sorry about that..

        so please correct me if i am wrong

        if there are 3 strike prices given in the exam,we must have to demonstrate maximum cap of each strike price given ! and there relevent premiums, then we chose which ever seems best and compute our answers !

    • sorry about that..

      so please correct me if i am wrong

      if there are 3 strike prices given in the exam,we must have to demonstrate maximum cap of each strike price given ! and there relevent premiums, then we chose which ever seems best and compute our answers !

      • Although most of the marks are for proving that you understand how options work, ideally (subject to how much time you have available) you should look at all the strike prices and then discuss.
        As I wrote before, it is rare that you can say that any one of them is definitely the best (if interest rates fall and we don’t exercise the option then the one with the lowest premium would be best, but if interest rates go up then the one with the lowest maximum would be best, but obviously we do not usually know what is going to happen in the future) – it is more a question of discussing in the exam, and again proving that you understand how they work.

    • The current futures price has do direct relevant (because we will only deal in the futures if we exercise the option and the trade will take place on the date we exercise the option).

      However, in exams we will usually need to know the current futures price (and the current basis) in order to be able to calculate what the futures price will be on the date the option is exercisable.

  12. Hi Sir,

    In the last part of the video where we calculate the prediction of maximum rate, you say that we cannot say which is the better of the two option between strike 94.25 and 94.50.

    But since we calculated that the total maximum cap. for 94.50 is 7.11% which is lower than the maximum cap. of 94.25 which is 7.34%, wouldn’t we be allowed to say that strike price of 94.50 is better since our payable of maximum interest rate is cap at a lower rate of 7.11%?

    • It certainly will end up better if interest rates go up.

      However, the problem is that it costs more and so if interest rates fall then we will have ‘wasted’ more money.

      Options are attractive if you think interest rates will fall, but you want protection (‘insurance’) in case you are wrong and they increase.

  13. Noted in a technical article on interest rate risk management a question on Titans FC that the LIBOR 6% translating to 94 and the futures price is also the same 94 on today’s date ie 15th Dec….. how can we calculate the futures price on its maturity?

    • In the article, the futures price is not 94 !!

      The price on 15 December of March futures is 93.790.
      So the basis is 94 – 93.790 and we assume that this falls to zero over the life of the future.

  15. Wow John you are a truly gifted, you make P4 seem so easy to understand and having used F9 and passed this registered so quickly…..many thanks.

    Will you be posting lectures on SWAPS?

    Thank you again!

  18. In example 6 the option is exercised on 18th September. But I thought that European options can only be exercised at the end of the month they are referred to by. So how does this work in practice? Many thanks, these lectures are so helpful.

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