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Under interest rate collars when depositing money we buy call and sell put.
My doubt is how do we get a loss while exercising the put option when interest rate increases to 4.1% ???
We have the right to sell the futures at 96.5 and we buy it at 95.74 so we exercise the option because there is a gain. Am I right? And if there is a gain there should be gain on exercising the option , why have they written/calculated loss on exercising the option???We sold the put option and therefore it is not us who has the right to exercise the option. It is the person who we sold the option to who has the right to exercise (we were the writer of the option).
They will exercise it because they will make a gain, and it us (as the writer of the option) who has to pay them the gain.
Do watch my free lectures on collars 🙂
Thank you so much sir, I finally understood now.
But I did watch your lecture. And I tried applying the same method that you taught, but I couldn’t get the right approach or answer.
Could you give a solution to the same question according to the method that you taught in the lecture?
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