Maximum Interest Rate/ Effective Interest Rate

Hi John

For a borrower – He limits his maximum interest rate payable by exercising his put option right?

As per your lecture the max interest rate/effective interest rate =strike price + spread + premium

However I have tried various questions and checked the effective interest rate the above way- it doesn’t match with the actual effective interest rate paid. I will write down the rates I got from all the interest rate option questions in this order ( rate using the lecture method/actual effective interest rate paid)

1) Alecto (Pilot Paper) – We exercise the option when interest rate moves to 3.8% and strike rate is 3.5%-Contracts rounded off to 37 from 36.67

(4.88%/4.70%)

2) Phobos (Dec 2008) – if we select strike rate as 6% we will exercise it when interest rate moves to 7%-Contracts are exact 80.

(6.668%/6.628%) – I thought the difference was due to rounding of contracts until I did this question.

3)Keshi (Dec 2014) – If we select 4.5% as strike rate , we will exercise when interest rate moves to 4.3%-Contracts are exact 42

(5.562%/5.342%)

4)Daikon (June 2015) – 62 contracts exact
Interest rate moves to 4.4%
Exercise price 4.5% – (5.504%/5.344%)
Exercise price 4.0% – (5.208%/5.048%)

5)There is a slight difference between the rates in your lecture as well.

What is the reason for this ? There is a difference between the rates even when we are a lender.