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Sir i have a doubt in part a and that is in first step of money market hedging why are we dividing by the investing rate of USA 3.1% instead of the borrowing rate of 4.8%?
Also do we always divide these rates by 4 if the annual rates r given?
thanks
Also sir in the first part for options I am confused im the step of calculating the amount not hedged , why are we only doing this in the second exercise price?
thanks againFirst question:
We divide by the deposit rate of 3.1% to find out how much we need to put on deposit now to be able to adored the payment in 3 months time.
We divide by 4 because it is for 3 months – 3/12 is equal to 1/4.
I do not think you can have watched my free lectures because I explain all this (with examples) in the lectures (both for P4 and for F9), and you cannot expect me to type out all my lectures here.
Second question:
For the first exercise price, it divides exactly by the contract size, and so there is no under or over hedge. With the second exercise price, it does not divide exactly.
Again, you must watch the free lectures – there is little point in attempting questions without studying first 🙂
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