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Dear Tutor,
in the latest article on how to answer interest rate RM question the autor states in the Discussion part that: “If Wardegul Co feels there is a possibility that interest rates will be higher than 5.41%, the point at which the 94.25 option would not be exercised, it may choose this option rather than the future.”
Could you please help how 5.41% is calculated.Thank you.
It is 100 – 94.25 – 0.34 (the unexpired basis) = 5.41%
If the interest rate were to be more than 5.41% then the futures price would be less than 94.25 and they would not exercise.
It may help you to watch my free lectures on interest rate risk management.
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