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while calculating the effective interest cost of a collar, why dont we consider the rate we will claim back?
i.e if we have made a cap at 8% and libor is 9.5% why do we took 9.5 in our effective rate calculation ?2) we do we compare with LIBOR to select whether to exercise or not??
and for someone who has bought a floor from us we compare his exercise price with futures price3) what factor are required to decide the MIX of these two in a debt portfolio?
We do consider the amount we claim back if the option is exercised.
Have you read my note on collars (and watched the lectures on options)?
As regard the mix of the two, if you mean the mix of put and call options (which are what are being used to create the collar) then you should consider all possible collars and discuss – there is no such thing as a ‘best’ collar.
collars:
in a question he hs calculated by adding 9.5 (libor) in (+2% as the company can borrow at libor plus 2%)
in calculation of effective int rate
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