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In 2(b) we are asked to devise a interest rate collar to hedge the risk. The answer suggested buying December call at 97 for 0.032 and sell Dec put at 96.5 for 0.123. Therefore, the net premium received will be 0.091.
However, why not selling Dec out at strike price 97 for 0.347 to get receive a higher premium at 0.315?
You could suggest that and you would certainly get most of the marks.
However it would not get you all of the marks because the question does say that the manager wishes to take advantage of favourable interest rate movements. Buying a call and selling a put, both at 97 would effectively end up fixing the interest rate at 3% (which would be similar therefore to having used futures, which she doesn’t want to do).
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