Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Sep/Dec 2015 Q2 Armstrong group Part b
- This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.
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- March 5, 2017 at 2:48 pm #375730
hi sir,
my question is mainly conceptual.
whilst calculating the Collar i came up with the combination , that if the interest rate decreases to 0.5% if the future price we calculated is, 96.74 for the exercise price of 97.
then i chose to “exercise ” the option as at 30 Nov,
selling at 97 and buying at 96.74 would potentially give a profit of
(97-96.74)/400 X 50 X 1000,000 = 32500.
in the actual answers they have chosen to sell 96.50 .and also got a loss on this exercise.
i am a bit confused regarding this. could you please point out why my answer is wrong and how assuming ive derived a profit of 32500 is actually wrong.
#2) second and last question is
i do keep the article on Collar and most of the ot notes handy and mainly learnt from here. but maybe i mis-learned something so have some major confusion regarding one thing.
when there is a Receipt,
we would buy a futures option to Buy (call option ) on the exercise date .
hence on the date of the exercise we will BUY the option on the exercise price on that date and SELL on the futures price we calculated using the basis.and if there is a Payment
it would be vice versa,
so we would SELL on the exercise price on the exercise date and so on.please if you would kindly correct me if im wrong.
thank you very very much alot indeed.
byeMarch 5, 2017 at 6:39 pm #3757641. Because they have bought a call option, the have the right to buy futures at a fixed price. They would not buy futures at 97 when their value is only 96.74 because they would make a loss – so they would not exercise.
2. With interest rate options, then if you are borrowing money you will buy a put option (to limit the maximum interest rate) and sell a call option (to limit the minimum interest rate). If you are investing money (as in this question) you will sell a put option (to limit the minimum interest rate) and buy a call option (to limit the maximum interest rate).
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