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John,
I have two query relate to this question, pls. clarify
1. For the a (ii), the option contract, I do not understand why the answer just apply the option exercise price is 94.00 as the best choice and ignore the other two EP
2. The Premium is calculated by No of contracts x premium of Mar put option x tick size, why the answer take the tick size in this formula due to the tick size just given in the future contract not in the option contract
I would be very appreciated to be receive the answer
Thanks
1. The examiner has ignored the other two because it says in the question that the object is to keep the borrowing rate at or below 6.6%.
2. As you will know from the lectures (and I assume that you have watched them) then I never bother using ticks (even though I explain them), and neither does BPP’s answer to this question (strictly, ticks should not be used for the premium – even though they work – but only for the gain when the option is exercised (but again you don’t really need to).
However, with interest rate options, because they are options on futures, the contract size is the same and therefore the value of a tick is the same.
The option premiums are always quoted as annual percentages and then calculated on a three month basis (because they are options on 3 month futures).
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