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In this question, we should buy put option and sell call option for collar.
The answer scheme choose :
Buy put options at 95·50 for 0·304 and sell call at 96·00 for 0·223
Net premium payable = 0·081However, I think it is better if:
Buy put option at 96.00 for 0.508 and sell call at 95.50 for 0.541
We will get the net premium receipt of 0.033.What do you think Sir John? 🙂 Is it because, it’s flexible to choose the exercise price?
They are borrowing money. Buy a put option at 95.50 will limit the maximum interest to 4.5%. Selling a call option at 96.00 will limit the minimum interest to 4%.
So the interest will end up limited to between 4% and 4.5%.What you are suggesting would not work. You cannot limit maximum interest to 4% and at the same time limit minimum interest to 4.5% – that is impossible.
They are borrowing money. Buy a put option at 95.50 will limit the maximum interest to 4.5%. Selling a call option at 96.00 will limit the minimum interest to 4%.
So the interest will end up limited to between 4% and 4.5%.What you are suggesting would not work. You cannot limit maximum interest to 4% and at the same time limit minimum interest to 4.5% – that is impossible.
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