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Hi Mr John,
not able to understand the logic behind this calculation
buy put cap sell floor call
Strike price 4.500% 4.00%
rate calculated 4.56% 4.56%
exercise yes no
loss 0.06%if we are buying the put to fix the max interest 4.5% and in future interest will be 4.56%, then we have a loss , as we agreed to pay max 4.5% and not it is 4.56%. how it is happened that we have gain 0.06% and not loss, why?
thank you
If the option is not exercised then they will pay 4.56%.
By exercising the option (which is the option to sell futures) they will effectively end up paying only 4.5%. What actually happens is that they will pay the 4.56% but will gain 0.06% by exercising the options and therefore end up paying a net 4.5%.
Have you watched my free lectures on interest rate options?
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