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Explain the strategy how to set max and min rate in collar with respect to loan and deposit?
How to use Black Schole model in warrant scenario and what is Pa and Pe in this case and how to calculate this?
There is no special strategy with respect to choosing which collar.
If you are borrowing, then a collar still gives you the benefit of limiting the maximum interest, but also sets a limit on the minimum rate of interest. The benefit of accepting a minimum rate of interest is that the net premium cost is reduced (but you still limit the maximum). (All being the other way round is you are depositing money).
If you are asked in the exam, then the main thing is to prove that you know how a collar works, but ideally (if you have time) you should list the available collars (depending on what exercise prices are given) and explain the effect of them on the max/min interest rates and the net premium
A warrant is a call option (the only difference from an ordinary traded option is that it is issued by the company). You can use the Black Scholes formula to place a value on it – Pa is the current share price, and Pe is the exercise price, as normal.
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