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Answer in the Book
Sell CallExercise Price 96
Future Price 95.4496 = 4 %
95.44=4.56%The call option is not exercised , since by not exercising the option, the option holder can buy the instrument at a lower market price of 95.44 instead of the higher option exercise price of 96.
My Question: isnt 96 at 4 % a better or lower market price than 4.56% for borrowing ? So should they exercise the call option to have the borrowing at 4% instead of leaving it for market value at 4.56% ?But the answer is saying the opposite.
They are selling the call option, so it is the purchaser of the option who will be deciding whether or not to exercise the option. They will not exercise it because they can buy the futures at 95.44 rather than exercise and pay 96.
It is buying the put option that will limit the maximum interest that Daikon has to pay. The purpose of selling the put option is to limit the minimum interest (in order the reduce the net premium cost for Daikon).
Have you watched my free lectures on collars, because the illustration (before example 7 in chapter 20 of our notes does explain this) ?
Thank you so much for your response , i greatly appreciate your time and you are so fast at responding much respect. Yes I did watch your lectures but needed further clarification. Thank you again
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