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Sir i am using Kaplan exam kit for practice. I came across two question (FNDC PLC (DEC 06 ADAPTED and ALECTO CO (PILOT 12)) of interest rate options in which interest rate option premium is calculated differently i.e 37*1000000*0.581/400 and 45000000*0.00165*2/12, and i don’t know it’s logic. Kindly guide me in this regard. Thank you
The Alecto calculation is correct. We divide by 400 because the premium is given as an annual percentage (so divide by 100) and they are options on 3 month futures (so divide by 4 because there are 4 periods of 3 months in a year).
The FNDC calculation is wrong. It should be 3/12 and not 2/12 (for the same reasons as above).
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