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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?
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).
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