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Current future prices suggest that interest rates are expected to fall during the next few months.troder plz expects to have $ 400 available for short term investement for a period of 5 months commencing later October.the company wishes to protect this short term investment from fall in interest rates.but is concerned about premium levels of interest options. It would also like to benefit if interest rates were to increase rather than fall. The company adviser suggested use of collar option…
Short sterling options 500,000. points of 100%.
Calls Puts
Strikeprice sept dec sept dec
95250 .040 .445 .040 .085
95500 0 .280 .250 .170
95750 0 .165 .500 .305LiBOR is currently 5% and the company can invest short term at LIBOR minus 25 basis points…
Required assume it is now early September.the company wishes to receive more than 6750.000 in interest from its investment after paying any option premium…..illustrate how collar hedge may be used to achieve this?
please solve it for me i don’t get how to calculated collar hedge..
hey give me clear table of strike price…and also tell me how much he wish to invest $400 or $400 million..and what is the maximum interest rate he wishes to receive?
Strikeprice sept dec sept dec
95250 .040 .445 .040 .085
95500 0 .280 .250 .170
95750 0 .165 .500 .305i’ve written whole question and there’s no further info. available………..if u can not answer me how to calculate it then plz tel me how to hedge through collars with simple example so that atleast i could attempt in exam….
This’ the collar hedge question from the exam kit right?
I’ll try to provide what i know.
When you hedge using a collar for DEPOSITS, means you want to limit the minimum interest that you want to receive (this can be calculated using the minimum interest rate that the company requires). Vice versa for borrowings.
Hence to set up a collar for DEPOSITS, you need to buy a call option (to set a floor) and sell a put option (to set a cap). Draw the graph, with cap line on top, and floor line at the bottom, and you’ll notice that the corresponding strike price for call option should be higher than the put option.
That’s why the answer shows only 3 possibilities.
Another thing to note is that when you buy the call option, you pay the premium. While selling the put option, you receive the premium. So from this, you estimate the outcome.
Hope this helps a little.
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