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Hi John I really get confused with this one? Can you please how do we open the futures I.e by buying or selling? And also how do we open optionS? Assuming that we borrow in both cases? And also kindly tell me briefly about the rationale behind it.
ThanksIt is not a question of opening and closing. You can buy and sell futures in the same way as you can buy and sell shares. You either buy first and then sell later (and if the price goes up you make a profit, and if the price goes down you make a loss). Alternatively, you can sell first and then buy later.
In the case of interest rate futures (which is what I think you are referring to), then if you are borrowing money then you will sell options now and buy back at the date the loan starts. The reason being that if the interest rate goes up (and therefore the loan costs more) the futures price will fall and so buy selling now and buying later at a lower price you will make a profit to compensate for the extra interest payable on the loan.
Have you watched the lectures on this (along with the course notes) because I explain there in detail how they work.
Ok thanks. I’VE got another question the question is about Aggrochem June 10 , in this quesion the answer has included the fair values of assets of both the acquirer and the aquiree in black scholes model, why is that? should not only the value of assets of acquiree ccompany come?
It is because the last paragraph above the requirements says that they wish to use Black Scholes to assess the value of the combined business. Also, the volatility given is the volatility of the combined business assets, and so we have no choice but to use the model to value the combined business (rather than just one of the companies in isolation).
Sir,
can you please summarize if a company is going to deposit money in 4 months time for a period of 6 months with option exercise prices being 94.00,98.00 and 92.00 how will an interest rate option and forming a collar would be like.The exercise prices give a choice of fixing a minimum interest rate of either 6%, 2%, or 8% they will get this by buying a call option (since they are depositing money)
They could also sell put options at these strikes that would limit the maximum interest rates and therefore create a collar.The choices for the collar would be:
Buy call at 98; sell put at 94. (so minimum interest 2% and maximum interest 6%)
Buy call at 98; sell put at 92. (so minimum interest 2% and maximum interest 8%)
Buy call at 94; sell put at 92 (so minimum interest 6% and maximum interest 8%)
The choice would obviously depend on what the net premium costs were.
(They could of course buy a call and sell a put at the same strike. E.g. buying a call at 94 and selling a put at 94 would fix the interest rate at 6% but there would be a net premium payable or receivable)
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