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Hi Mr. John,
Q4 Daikon Co, just want to know with regards to collars why was 96 strike price not chosen to buy put and 95.5 to sell call when the result would have been more favorable.
In the exam, we need to either provide workings for both strike prices or a justification for choosing one over the other. Would not have time to provide working for both strike prices hence need to know how to choose between the two strike prices.
But the collar that you suggest is not feasible.
Buying a put at 96 would limit the maximum interest rate to 4%. Selling a call at 95.5 would limit the minimum interest rate to 4.5% which would be nonsense. By all means use options and buy a put at 96, but there would be no point in creating a collar in that case.
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