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Dear Tutor,
I did not see the answer for this question.
Can you please help?
I got 7.17 % as net cost of interest rate collar hedge, but i don’t know if there is any other calculations to be done.Many thanks.
KennyThere are several collars available.
For example, we could buy a September put at 94.25 and sell a September call at 94.75
The put would fix a maximum interest rate of 5.75% + Agnes premium of 1.4% which is 7.15%
The call would fix a minimum interest rate of 5.25% + Agnes premium of 1.4%, which gives 6.65%
The net premium would be 0.19 – 0.03 = 0.16%Other collars available would be:
buying a put at 94.50 and selling a call at 94.75;
buying a put at 94.25 and selling a call at 94.50
and also, buying a put and selling a call at the same strike price, which would effectively be a way of fixing the interest rate.
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