troder is borrowing money, isn't it? if that's the case it should buy put at strike price 95.25 and sell call at 95.75,usually we find future price and compare it with strike to know whether we should exercise or not ,here it has done differently ...why we are adjusting premium paid and received with 4.25 % [100-95.75) whats reason behind in taking 95.75?
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54 troder
9y ago#1Troder is depositing money! (the first two sentences of part (b) of the question make that very clear).
Therefore they will buy a call at either 95.75 or 95.50 (which will fix the minimum interest rate at either 4.25% or 4.5%) and sell a put at either 95.50 or 95.25 (which will fix the maximum interest rate at either 4.5% or 4.75%).
We can't find the future price because there is nothing given in the question about it.
Also, the question makes it clear what the minimum net interest they want is, therefore we have no choice but to calculate the minimum effective rate for each collar (after adjusting obviously for the net premium).
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