- This topic has 3 replies, 2 voices, and was last updated 7 years ago by
.
Viewing 4 posts - 1 through 4 (of 4 total)
- Posts
Hi Mr. John,
Could you pls explain why strike price of 94 needs to be chosen and not others for interest rate options.
Many thanks in advance.
Because the question says that LIBOR is currently 6% and given that they borrow at LIBOR + 50 basis points, it is currently only just below the maximum rate they would like to achieve of 6.6%.
So they need to be protected against LIBOR increasing by only 1%.
Since futures prices move in line with LIBOR the examiner chose 94.00 because this is equivalent to LIBOR of 6%.
Having said that, the marks are for proving that you understand how options work, and so if you had chosen one of the other exercise prices then you would still get the marks (provided, obviously, you had shown your workings properly).
Viewing 4 posts - 1 through 4 (of 4 total)
- The topic ‘BPP Practice Kit – Phobos CO.’ is closed to new replies.