Massie Co P4 Collar

Please tell me which exam the question was in. Have you read my note on collars, because the note does explain which options to choose? You can find it here: https://opentuition.com/articles/p4/interest-rate-collars/

Hi, yes sorry it was the Sep/Dec 15 hybrid

Since they are investing money and are worried about interest rates falling, they will fix a floor by buying call options (because if the interest rate falls, the futures price increases so they can exercise the option and buy futures at a lower price and immediately sell at a higher price and make a profit. To reduce the net premium cost, they can create a collar buy selling put options and this creating a cap. If you watch my lectures on interest rate risk management, you will appreciate that if we are investing then we would buy call options to create a floor, whereas if we were borrowing we would buy put options to create a cap. If we create a collar we always do the 'opposite' thing as well. I.e. if investing we buy call options, and also sell put options. If borrowing, we buy put options, and sell call options. Do watch the lectures, and read the article that I gave the link to.

I think my confusion is I look at a call option as a right to receive interest at a given % so at 97 I would exercise my right to receive interest at 3% if IR went down, so I can't understand why they wouldn't buy a call option at 96.5 (and sell the put at 97) instead giving them the right to receive interest at 3.5% if IR went down Looking at the comments on the link is it just a case of pick any call and an opposite put just to show you understand how collars work Thanks

That is correct - there are several combinations of collars possible, and unless the question specifies otherwise any combination is acceptable so as to prove you understand how the collar works.