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Dear Sir,
I have read article on collars, but still struggling with one thing.
In the question you got 95,5 and 96 strike prices. Answer says buy put at 95,5 and sell call at 96.
I got the idea of minimum and maximum rates to secure.You wrote in the other post:
“If they are borrowing, then with a collar they want to limit the maximum rate, but to save on the net premium they will accept a limit on the minimum rate they end up paying”.But question is, could you please in easy terms give us algorithm for borrowing and deposit?
Like I have to borrow, I am afraid that rates will rise, and I got these 2 prices.
I would struggle whether I shall sell put for 95,5 and buy call at 96. Or maybe sell call for 95,5 and buy put at 96. Or maybe buy put for 95,5 and sell call for 96 or even buy call for 95,5 and sell put for 96.
There are 4 options and till now it is rather that I memorize in e.g. options that if it’s borrowing then do buy put in options than understand wordings and actual logic behind it.I know i messed up the question here a bit, but mainly it is always this first step in questions that you have to get, rest is just calculation mechanically. If I fail with 1 step the latter calculation will bring just 0 mark.
Kind regards,
MatIf they are borrowing, then they are worried about the interest rate rising.
If the interest rate rises then the futures price will fall. So to limit the maximum interest rate, they will buy a call. (If they buy a call at (say) 96 then this will limit the maximum rate to 4%). I explain this in detail in my free lectures on options.
They can reduce the net premium cost by selling a put (and thus creating a collar). If they sell a put option at (say) 97, then this will mean that the minimum interest rate will be limited to 3%.
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