Daikon June-2015 Q-4 Collar problem

Because they are put options, they have the right to sell futures at the exercise price which will mean buying the futures on the same day at whatever the actual futures price is.

So if the exercise price is higher than the futures price they will exercise the option and sell at a higher price than they buy (and make a gain).
If the exercise price is lower than the futures price then they will not exercise because they would then lose money.

Dear Sir,

I also have gone through the lecture of Interest Hedge but I could not understand the answer of “Using a collar on options to hedge”

Why choose “Buy put” at 95.50 and “Sell call” at 96.00?

Why don’t choose “Buy put” at 96.00 and “Sell call” at 95.50?

If we choose “Buy put” at 96.00 and “Sell call” at 95.50, the result as below:

Buy put Sell call
Exercise price 96·00 95·50
Futures price 95·44 95·44
Exercise? Yes No

Premium payable: $ 95,200
Net cost of the collar: $ 5,610 ((54.1-50.8)*25*68)

Better result, is it right?

Thank you so much, Sir

quanghado:

Buying a put at 96.00 would limit the maximum interest to 4%
Selling a call at 95.50 would limit the minimum interest to 4.5%

That would surely be nonsense 🙂

If they are borrowing, then with a collar they want to limit the maximum rate, but to save on the net premium they will accept a limit on the minimum rate they end up paying.