Excercise Price

There is no 'best' exercise price. If you are borrowing then you want to set a interest rate cap. You can get lower caps by choosing a higher exercise price, but the premium cost will be greater (and, of course, the premium will be 'wasted' if the option does not end up being exercised). In the exam, if it is not specified which exercise price to use, then ideally you will show what happens for all of the exercise prices available in the question. Have you watched my free lectures on interest rate options?

Thanks Sir, yes, I have seen your lectures and those are really helpful.

You are welcome :-)