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Dear Sir,
please explain for me for the case we choose optionwhy they use borrowing rate 4.7% instead of using option price (4.5%) to caculate the outcome of option ($18m*4.7%*7/12)?
( BPP answer : Net effect = borrowing rate+ premium -/+ gain/loss on option for both case choose option and not choose option)
Thanks sir,
Firstly, with interest rate options we always calculate the interest at the actual interest rate. If the options are exercised then we bring in the gain on the options as well.
Secondly, there is never a loss on options because if there was going to be a loss then they would not be exercised.
All of this is explained in detail, with examples, in my free lectures and I do suggest that you watch them.
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