Mr. Moffat,
Thank you for all these lectures. I have been practicing a December, 2008 question named "phobos". The company is based in the UK and has a borrowing requirement of 30m pounds and the options are also quoted in pounds. The kit and paper suggested the company buy a put option but i can't see the logic in this. Can you clarify please?
Wouldn't the call option fix a rate now?
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11y ago#1Neither put or call options fix an interest rate - the fix a maximum or a minimum.
If you are borrowing and wish to fix a maximum rate then you will always buy a put option.
(It is because if interest rates go up - which means paying more interest on the loan - then futures price will fall. By having the right to sell at a fixed price you can make a compensating gain by buying futures at the lower price and selling them at the exercise price.
For more explanation, and examples, you should watch the free lecture.
Thank you, Mr. Moffat
11y ago#3You are welcome :-)
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