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ALECTO CO (PILOT 12)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › ALECTO CO (PILOT 12)

  • This topic has 3 replies, 2 voices, and was last updated 7 months ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • July 5, 2022 at 12:23 pm #660000
    Frooti
    Participant
    • Topics: 80
    • Replies: 75
    • ☆☆

    If interest rates decrease by 0.5% to 2.8%
    Buy put Sell Call
    Exercise Price 96.00 96.50
    Futures Price 97.02 97.02
    Exercise ? No Yes
    Underlying cost of borrowing (from above) €330,000
    Premium
    7.3 × €25 × 37 €6,753
    Loss on exercise (52 × €25 × 37) €48,100
    Net cost €384,853
    Effective interest rate 4.20%

    Why gain on call is treated as loss and included in put’s calculation?

    July 5, 2022 at 3:51 pm #660014
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51563
    • ☆☆☆☆☆

    We bought a put and therefore it is our choice as to whether or not to exercise it (and we will only exercise it if we make a gain).

    We sold a call, and therefore it is the person who bought it from us who decides whether or not to exercise it. They will exercise it if they will make a gain and if they do exercise it then it is us who will have to pay them (i.e. a loss to us).

    July 6, 2022 at 7:57 am #660061
    Frooti
    Participant
    • Topics: 80
    • Replies: 75
    • ☆☆

    This logic is used only in collars?

    July 7, 2022 at 8:29 am #660101
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51563
    • ☆☆☆☆☆

    It is only when creating a collar that they will be selling an option as well as buying an options. Otherwise they only ever just buy options.

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