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Dear all, i’m confused about choosing the strike price of both the call and put in the collar when i’m doing Q2 on DEC 2011 paper.can anyone help me with this? Thank you.
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I am having the same problem calculating the strike price. Help please thanks
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Hi there. Have you managed to get the answer for this? It’s a bit late but hope this helps.
Alecto requires a ‘Borrowing Collar’ to hedge its position against rising interest rates whilst foregoing benefits of a lower rates in order to manage premium costs.
A Borrowing Collar entails BUYING PUT and SELLING CALL.
PUT is also known as a CAP, as the strike price would reflect the maximum interest rate the company would pay for to hedge its position.
CALL is also known as a FLOOR, as the strike price would reflect the minimum interest rate the company would sell for to manage its premium costs.With this in mind, PUT (ie/cap) strike price should reflect a higher interest rate than a CALL (ie/floor) strike price.
A strike price of 96.00 reflects interest rate of 4% (100 – 96)
A strike price of 96.50 reflects interest rate of 3.5% (100 – 96.5)Between these two prices, 96.00 should be chosen as the strike price of a put and 96.50 for a call.
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