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respected tutors,
i have a doubt how premium cost in Interest rate options are calculated
we have $ 30 milion to invest
the contract size is $ 500000
hedgeing is needed for 2 months
and option contracts are available for a 3 month period with
premium cost at 0.085% with a strike price of 93.75
so in this case whether the premium cost will be calculated on
$30 milion as 30000000*0.085%*2/12 OR
40*500000*0.085%*2/12
please explain40 X 50000 X (0.085/400) = 4,250
No of contracts = (30,000,000 /3 X 2) / 500000 = 40
0.085/100 (This will show the value at percentage)
And 0.085 p. a interest cost. So we have to find out for 3 months.
This will give (0.085/100/12*3) = 0.085/400Do remember interest options always for 3 months; which premium will be quoted in p.a. basis
Hope above helps
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