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i read your notes on interest rate collar.What i still dont get is how do we got those strike price for call and put , where we got 4.25%? why call premium deducted ? since we are receiving the premium we should add right and since we pay premium on put option it should be subtract so we derive net receipts ? referring to b(i) calculation
in part b(ii) of calculation
we took 0.280 ,is it because in call option we exercise at lower interest than what to agreed (its given in q LIBOR 5 LESS 25 BASIS POINT ie; 4.75) equivalent option is the dec call option .I am bit confused here why we deduct .28 and add 0.085??Have you also watched the lectures on options and futures (because interest rate options are options on futures)?
A strike of 95.750 is equivalent interest of 4.35%, a strike of 95.50 is equivalent to 4.5% and so on.
They are investing, so they are buying call options so they pay a premium which means the maximum interest they receive is effectively reduced. The are selling put options to they receive a premium which means the maximum interest they receive is effectively increased.
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