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Dear sir,
For collar hedge in part b, i have some question
1. Is it the main purpose for collar hedge is to reduce the premium costs?
2. In part”interest rate decrease to2.8%
Why the exercising of sell call option will cause a loss? i thought is a gain because higher lending rate.Kindly advise,thanks~
1. Yes – that is the reason.
2. We have sold the call option. So if interest rate falls, then the buyer of the option will exercise it (because the futures price increases). So we have to pay out to the buyer.
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