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Dear sir, When choosing the strike prices you opted for choosing the price that you wanted to fix the interest rate in as per example that would be 12%(88) however If I had choosen 80 as a strike price (20%) and the interest fell by 2%. I would make a gain of 2% in the futures deal if I was leaving the transaction at risk I would be paying 14% however due to the gain I would effectively be paying 12%. hence fixing the rate. Now my question is why not choose other strike price. why choose the 88 is there a reason for that. Thank you in advance
In the exam then if you have the time you should show the workings for all the strike prices given. (If you do not have time, then just showing one will get you more than half the marks for that part because the marks are for ‘proving’ that you understand how options work).
There is no ‘best’ strike price. Different prices will limit the maximum interest rate but for a lower maximum the premium will be higher (and the premium is payable even if it is not needed to exercise the option).
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