Hello John,
In S/D 20, Q3 part b, it says that "The traded options available may last for a short period, perhaps up to two years, less maybe than the period of the loan. Swaps
can be arranged for a much longer period." From what I've learned options have a standard maturity of 3 months and swaps have this benefit over options as they can be arranged for longer durations whereas option contracts need adjustment. Then why it says that traded options may last upto 2 years?
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Option vs Swaps
4y ago#1The examiner did later correct himself and state that using options would effectively mean keep selling and reinvesting if it was for more than 3 months.
Although the loan is for 3 years, we don't need to hold options for that duration because what we're actually hedging is the fluctuation of interest rate from now to the date we'll take out the loan like after 4 months. So why we need to keep selling and reinvesting, when can just adjust the number of option contracts for the longer duration of loan??
4y ago#3What you have written is true if the borrowing was fixed interest borrowing. However it is not fixed interest and the risk is that the interest rate will changed during the period of the loan.
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