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Hi,
have a question regarding option on interest rates. Company will deposit money. Why below option is not exercised?
for me Exercise price gives more favourable interest rate (5%) than market 4,99%.
Interest rates rose to 4.99%
Exercise price 95.00
Futures price 94.55In future you must ask in the Ask the Tutor Forum if you want me to answer.
Given that they are depositing money, they will have bought call options, which are the right to buy futures at 95.00.
Exercising the options would mean buying futures at 95.00 and then immediately selling them at 94.55. This would result in a loss, and therefore they will not exercise the options.(The options are not directly on the interest rates).
This is all explained in detail in my free lectures on interest rate risk management.
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