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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Options

  • This topic has 3 replies, 2 voices, and was last updated 9 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • February 13, 2016 at 8:11 pm #300338
    hermine
    Member
    • Topics: 26
    • Replies: 34
    • ☆☆

    Dear John,

    It is not clear for me why in the Kaplan question Phobos CO, March options at a price of 94.00 are choosen. I think that 93.75 is not being considered as the treasurer wants to keep the maximum borrowing rate at or belo 6.6%. But why not to consider the strike price of 94.25?

    Thanks in advance.

    February 14, 2016 at 7:30 am #300366
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    I am sorry but I do not have Kaplan books.

    February 14, 2016 at 7:38 am #300374
    hermine
    Member
    • Topics: 26
    • Replies: 34
    • ☆☆

    It is a qestion from December 08 exam.. It says Libor is currently 6%. Phobos can borrow at a fixed rate of LIBOR+50 basis. The treasurer would like to keep the maximum borrowing rate at or below 6.6%.
    There are three strike prices for put options:
    93.75
    94.00
    94.25
    It says that options at 94.00 should be bought and makes no calculations for the other two.

    Why?

    February 14, 2016 at 12:20 pm #300411
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    94.00 effectively limits LIBOR to 6%, so when adding the 50 basis points, this comes to 6.5%. This can potentially limit to below the required 6.6% (subject to the premium payable).

    93.75 will limit to 6.75% (using the same logic) and ignoring the premium and so this cannot achieve the requirement.

    However, 94.25 will limit to 6.25%, which subject to the premium could achieve the requirement.

    Therefore I would consider both 94:00 and 94.25, although just looking at one of them would still get most of the marks.

    (This is actually an awful question for other reasons – it was set by the previous examiner who set some dreadful questions but is fortunately no longer the examiner 🙂 )

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