Hi,
i am a bit confused about fixing the collar. A borrower will buy put option and also sell call option now at strike price of 95.75 and 96.25 respectively. when the loan start, the future prices have moved to 95.81. so,here we are not exercising both options because doing so will be loss making.
suppose the futures have moved to 96.61. we will exercise the call option only as we will buy at 96.25 and immediately sell at 96.61. clearly this is a gain and would have reduced the net cost but sir, in answer to question 87 kaplan the examiner computed this as a loss on option. i am struggling how it can be a loss and if it did,we would have thrown the option to exercise and stick with the market.
thanks.
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collar
4y ago#1You will have to tell me which question your are referring to. I do not have the Kaplan books (only the BPP Revision Kit). However I do also have all past exam questions and I assume that it is a past exam question because you refer to the examiner.
Apologies for misuse of terms. i thought those answers at the back of kaplan kit is provided by the exam setters and i assume it is the examiner's work. anyway, English is my third language. I will look for better term in future haha but if you help me with one, i appreciate .
going back to the question,
i don't know how i will going to put it since you don't have kaplan but i will appreciate your explanation from the data i provided in the initial post.
thanks,john.
4y ago#3I really need to see the whole question.
If it is the Exam Kit then it is probably a pas exam question. Tell me the name of the question and I may be able to find it.
Fitzharris co. it is september/december 2020 question.
4y ago#5It is not the company that decides whether or not to exercise the call option.
They have sold the call option and it is therefore the purchased of it who decides whether or not to exercise. If they will make a profit by exercising then they will exercise and the company therefore makes a loss.
ooh ok. the company is the dealer in call option. so they will make profit if the purchaser(the depositor) did not exercise the option. As the purchaser will only exercise when he/she can be buying at lower rate,which means the company will be buying back at higher rate to close the deal hence loss on option.
that's wonderful. Thanks for this. i was seeing it the other way all along.
4y ago#7You are welcome.
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