- This topic has 2 replies, 2 voices, and was last updated 1 year ago by John Moffat.
October 20, 2020 at 9:43 am #590715sephora1
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i watched your video regarding interest rate collars.
then i attempted 2 questions..one with deposit and one with borrowing.so i would like you to verify my logic at arriving the figures
q.armstrong group sep dec 15
for this question the amount is a deposit.
so i created a collar by buying a call and by selling a put.
also i kept rule in mind:exercise price of put is less than exercise price of call.
then i wrote the outcome like this:
futures interest : 4.26% 4.26%
floor : 3% ceiling 3.5%
exercise? no yes
so here my logic is like this:
we are depositing money.
we need a minimum interest rate of 3%…but the futures inteest rate is 4.26 percentage..so we are getting above the minimum we are happy and we do not exercise it.
then… we had sold put to other people..they are ready to pay a maximum of 3.5%
but futures inteest rate is 4.26 %..so we pay (4.26-3.6) to those other people .
then outcome for 3.1%
futures interest :3.26% 3.26%
floor 3% ceiling 3.5%
exercise no no
here.. the minimum we need is 3% but we receive interest of 3.26 so we do not exercise the option.
and the maximum that the other party is readytopay is 3.5 % but they only have to pay 3.26%..so they do not execise it..
so this was my logic regarding the question armstrong..can you correct me if i am wrong in the approach.
now for question daikon june 15
in this question there is borrowing and this is how i created collar
buy put and sell call
execise price of put is lesser than exercise price of call.
so doubt 1: in both cases be it deposit and borrowing…exercise price of put should be lower than execise price of call ight?
for this question the outcome:
futures interest : 4.56% 4.56%
ceiling 4.5 floor 4
in this question we have borrowed money …so the maximum interset that we are ready to pay is 4.5%…but fi is 4.56%..so we execisethe option and claim (4.56-4.5)
then…the minimum that the other party wants is 4%..they receive 4.56% so they do not exercise that option.
ok so i had typed out my logic in approaching these questions and i would appreciate it if you rectify any mistakesin arriving at theseconclusions …
and also n both cases be it deposit and borrowing…exercise price of put should be lower than execise price of call right?October 20, 2020 at 9:46 am #590716sephora1
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Sir if you could open and read this question on a laptop it won’t look confusing because I have typed out my answer in a particular order ..when I read this through mobile the datas arrangement has moved..October 20, 2020 at 11:54 am #590751John MoffatKeymaster
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Your logic is correct for both of the questions 🙂
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