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Hi Sir!
One quick question.
Why do they buy a call option at 97.00 and sell the put at 96.50 and not the other way around?
In your lectures you explained that we would buy call options if we’re deposing/investing money and I thoroughly understood that concept, but I am really confused on which rates do we have to use if we’re buying call options. Do we always have to use the higher rate (97) for call options regardless of whether we buy or sell call options?
How do we determine the rate for both call and put options if we’re deposing/investing money?
Pls Advise!
Thank you in advance for your kind explanation Sir!
If we are depositing then we want to limit the minimum interest rate. Buying a call option with an exercise price of 97 will limit the minimum rate to 3%.
If we decide to create a collar in order to reduce the net premium, we will also limit the maximum rate. The maximum rate will have to be more than 3% and so we will sell a put option with an exercise price of less than 97.
Sir,
Let’s say, just for the sake of argument, if we’re borrowing we would want to limit the maximum rate(cap) so we will buy put option with an exercise price of 96.50 and if want to to create a collar, we should sell call option with an exercise price of 97.00 in order to limit the minimum rate(floor).
Hope I am making sense here, kindly correct me if otherwise.
Now again, I am finding myself scratching my head and finding difficult this.
Sir, could you please enligten me on this!SELL put
Exercise Price: 3.5% (96.50)
Future Price : 4.26% (95.74)Why are we exercising PUT OPTION(sell) here, as the future rate seems to be higher? Since we are depositing we’re supposed to seek for higher rates right?
Thank you in advance for your explanation sir!
Exercising the option would mean buying at the futures price of 95.74 and immediately selling at the exercise price of 96.50.
Given that 96.50 is higher than 95.74, exercising the options would give a gain and therefore they will be exercised.
Sir, Let’s say if we’re borrowing then we having to “Sell Call Option”s”Right?
Then how do we account for? Pls Advise!
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