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Dear Sir,
In the Awan Co, Part a, the working for option on future is as below:
If interest rates increase by 0.9% to 4.99%
Exercise price 94.5
Future price 94.55
Exercise? Yes
Gain in basic point 5
Underlying investment return 766,400
Gain on options (0.0005 x 2,000,000 x 3/12 x 32) 8,000In my opinion when we know we exercise this option, we use the exercise price to calculate the return (100%-94.5%) x 2,000,000 x 3/12 x 32 = 880,000. I am confused on the different result and why we don’t use the exercise price to calculate return in this case?
Thanks,
DTInterest rate options are options to deal in interest rate futures.
We calculate the gain if they are exercised by taking the difference between the exercise price and the futures price on the date that they exercise it.
I do suggest that you watch my free lectures on interest rate options.
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