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in borrow and depoist questions,what intetrest should we recommend at the end of the answer respectively. Just correct me if i am wrong – suggest a lower effective int rate among all options if its a borrowing question ,suggest a higher effective int rate if its deposit .is it?
what all are the other names for borrowing and deposit that can be asked in exam??
If I understand that you have written correctly, then you have got it the wrong way round.
When a company borrows money (i.e. takes a loan) they will be charged a higher interest rate than the interest rate they will receive if they deposit money. (That is how the bank makes a profit – the bank charges more interest when they lend money than the interest they give when someone deposits money with them.)
I was asking interest rate option questions where we will be asked to give a recommendation/advise to a particular company after all option calculation has been done .We may be asked to advise suitable hedge option if interest rate hikes or lowers.Assume in question they asked to suggest a suitable hedge strategy for X co among Futures, Interest rate options,collar. At the end of the calculation we are required to find an effective rate for the respective hedge option. so what recommendation should we give based on effective rate for borrowing /deposit ?
i think we should recommend lower effective interest rate if company intends to borrow since hedging cost can be cheaper and higher effective rate good option of hedge if company deals in deposits .Am I right?hope i made it clear
You are right, except with regard to options there is never a ‘best’ exercise price to choose (and you cannot be expected to give one – only to be able to discuss). The reason is that using different exercise prices can limit the maximum interest payable on borrowings (or the minimum interest receivable on deposits) but the more you limit the more the option will cost, and the cost will be ‘wasted’ if the interest rate moves in our favour and the option is not exercised.
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