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ALECTO (PILOT 2012) – Collar

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › ALECTO (PILOT 2012) – Collar

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by John Moffat.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • November 14, 2016 at 2:16 pm #348929
    accalegend
    Member
    • Topics: 10
    • Replies: 21
    • ☆

    If interest rates increase by 0.5% to 3.8%:

    Buy put Sell call

    Exercise price 96.00 96.50
    Futures price 96.02 96.02
    Exercise ? No No

    Q1: What is the basis in collar hedging to determine whether to exercise or not?

    Puts Calls

    June premium 0.163 0.581 0.391 0.090
    Exercise price 96.00 96.50 96.00 96.50

    Q2: Why selected “Buy June put at 96.00 for 0.163 and sell June call at 96.50 for 0.090. Premium payable = 0.073 (0.163 – 0.090)” and cannot say for instance “buy June put at 96.50 for 0.581 and sell June call at 96.00 for 0.391?

    Do you have a recorded lecture for collars??

    November 15, 2016 at 8:07 am #349014
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54681
    • ☆☆☆☆☆

    Whether we exercise or not is the normal rule for deciding whether or not to exercise options – that in itself is not a collar problem.

    Although there is no lecture, I have written a detailed note on how collars work and that should answer your problems.

    You can find it here:
    https://opentuition.com/articles/p4/interest-rate-collars/

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