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Dear John, thank you so much for your wonderful lectures on Hedging.
My question is for Interest rate hedging – exam requirement.
Alecto – 2013 Pilot
Hedged rounded up to 37m, before rounding 36.67MFrom answer given, ONLY “FUTURES” part, it calculated cost of borrowing and Hedge P/L in “€” and recalculate “%”.
BUT for “OPTIONs” and “COLLAR” it did not, despite the difference due to contract number rounding up, the answer just added the % of borrowing cost and % of p/l from contract together, as if there is no difference..
We could have calculated € and % to get the accurate amount but it take longer and (I calculate from “€ to “%”)the result is only 0.01% different.
But I am not sure if I can do the same (not calculate actual amount of contract p/l and borrowing cost, just use % only) for ALL interest rate “Options” and “Collars” ?
Thank you!
Unless you are looking at an amended answer in a Revision Kit, the examiners answer does not do as you have written.
The underlying transaction cost is calculated at whatever the interest rate turns out to be, and if the options are exercised the gain is calculated on the 37 contracts.
yes. i m using latest bpp revision kit, and now I found Examiner’s answer is same way as what i understood from your lectures.
Thank you sir!
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