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Dear sir,
For the options, the premiums are in annual %
If that the case, for strike price 4.5% (95.5), premium will be 0.304%.
Strike price 4.0% (96.00), premium will be 0.508%.(1)
I don’t know in this case if I am supposed to add or deduct the premium cost.
Usually for put options, net benefits = Strike price – premium costs.
But if I take 4.5% and deduct 0.304% = 4.196%, meaning that we can borrow at….lower cost?The premium is a cost that is always payable. If they are paying interest then the premium means the total payment will be higher. If they are receiving interest then the net receipt will be lower because of having to pay the premium.
Have you watched my free lectures on this?
Yes I do, but I get especially confused when doing interest rate hedge due to the P=100-r formula.
But either way, thank you for explaining to me! Crystal clear.
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