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Good evening John,
Sorry to ask this.
Collar hedging part –
If interest rate decreases by 0.5% to 2.8%, the answer says we exercise the SELL CALL, when future price is 97.02, while Exercise price is 96.50.
It shows as a loss on exercise, why do we exericse?
Loss = 52 tick X Euro 25 x 37 contract = Euro 48,100
Is it a gain, actually?Thanks John.
It is not ‘us’ who will exercise – it is the person who bought the option from us who will exercise the option because they will gain. Therefore we will have to pay out to them and it is a loss to us.
Do read my free note on the way that collars work.
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