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when you are receiving money we buy a call option and sell a put option with a collar arrangement. lets say we have strike price of 96.50 and premium for calls 0.182 and premuim for puts 0.123 and strike price of 97.00 with premium for calls at 0.032 and premium for put options is 0.347. is there an order in which i can pick whether i buy a call option at 96.50 and sell at 97.00 or buy a call option at 97.00 and sell a put option at 96.50. Or is it up to me to decide which strike price i start with.
It is up to you to advise – there are often more than one collar that may be created, and there is no ‘one best collar’.
Most important in the exam is just to prove that you know how collars work, and any one choice is sufficient.
Using a question called Daikon co june 2015, using your guidelines in the video kindly advice if the below Collar is correct.
Buy a put option at 95.50=4.5%
Extra paid by Daikon 0.7%
5.2%
Premium 0.081% 0.304-0.223
Total 5.28%capsell a put option 96.00=4%
Extra 0.7%
Premium 0.081%
Total 4.78%Hence collar is 4.78% to 5.28% is this correct.
Secondlyhow do i use this range to calculate the extra cost of borrowing that will be reduced by.
No, it is not correct and it is not what I do in my lectures, but I am hoping that it is just that you mistyped.
To create a collar (when borrowing money as in this question) we always buy put options (which limits the maximum interest rate) and always sell call options (which limits the minimum interest rate).
Because there are only 2 strike prices given in the question, the only collar possible is buying a put at 95.50 and selling a call at 96.00 (you have written that we sell a put at 96.00).
Otherwise what you have written is correct.
Good day Sir, sorry i meant to say sell a call option. To calculate the extra cost of borrowing that will be reduced by the collar, since my interest rate is in range form, does that mean that the amount of extra borrowing that will be reduced will be in range form too?
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