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sir in one of the kaplan mocks, we have been provided with data about exchange traded options (exercise price and premium) and we are told that the company is planning to borrow. we are told that the current LIBOR rate is 3% and that the entity can borrow at LIBOR + 55basis points. but no where are we told the magnitude of change the company is expecting 4months later when it intends to borrow( in all past papers we were told that the company is expecting the interest rates to go up by say 0.5% or down by 0.8%).
For exchange traded futures, lock-in rate can be found out and worked with. But here with options what do we do?
Kaplan answer shows that options expected LIBOR lock in rate has been found out, using absolutely the same process as is used for finding futures lock-in rate, just replacing the opening futures price with exercise price of options.
I am highly sceptical of what they have done. It really puzzles me to see them find a lock-in rate in options!! in all the sums that i have done so far involving interest rate options, nowhere has it ever happened that options at the same exericse price yields same interest rate or deposit rate.
Pls help sir!
It is difficult for me to answer without actually seeing the question – if it is marked as being a past exam question then please tell me the name and the exam, because I have all past questions.
Options do not have a lock-in rate as such, but if the option is exercised then the effect is to fix the interest at the rate equivalent to the exercise price.
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