September/December 2015 Armstrong Group Part b-Collars

Because they are investing money, they will buy a call in order to fix a minimum rate (and sell a put to limit the maximum). Buying a call at 96.50 and selling a put at 97.00 would be fixing a minimum rate higher than the maximum rate which would be nonsense.

Dear Sir, Why the basis is calculated as 1/4 instead of 1/3 when it is starting Nov 30th? Could you plz explain? Confused!

"Today" is 1 September and the money will be deposited on 30 November, which is 3 months from now. A December futures finishes at the end of December, which is 4 months from now. Therefore there is 1 month left on the future then the deal is finished. 1 month out of 4 means 1/4 of the basis remains. I do suggest that you watch my free lectures on interest rate risk.

Sorry, I have jumped start on the interest part so I missed today's date. Thanks a lot once again

1) I still don't really understand, as a investor we want the highest rate so at 96.50 its 3.50% vs 97 which is 3% what is the process of determining this "maximum" for both a investment and a borrowing scenario? 2) So let me just confirm setting a collar for a investor would be buying a Call which is the higher number and selling a put will be the lower number(for example buy call 98.00 sell put 96.00) And when borrowing it would be Buy a put lower number, Sell a call higher number (for example buy put at 96.00 and sell Call at 98.00) Thank you very much.

If you are depositing money, then you want to limit the minimum rate. You do this by buying a call option. If you buy a call option at 97.00 you have the right to buy futures at a price of 97.00. If interest rates fall below 3% then the futures price will be higher than 97.00 so you will then exercise the option - buy the future at 97.00, sell it at the higher price, and so make a profit to compensate for the fall in interest. If you are borrowing money then it happens in reverse and you will buy a put option. The rest of what you have written is correct. Again, I do suggest that you watch the free lectures on how interest rate options work.

Hey sir, can you please explain in relation to the interest rate collars, where the interest rate increased, why did they make a loss if they exercised at $96.50?

Thank you for the brief explanation, I AM TRYING TO WATCH THE VIDEO FOR DEEPEN MY UNDERSTANDING OF HOW THE WHOLE INTEREST RATE COLLAR AND SWAPS WORK FOR EXAMINATION PURPOSES. THANK YOU.

Please, I also want to know when it is advice to calculate tax allowable deprecition on a sepearte woking and when its appropriate to deduct from the table to enable us charge tax and then add it back. what are the things to be considered for this treatment in NPV calcutions both domestic and international. Thank you

Do also read my article on collars: https://opentuition.com/articles/p4/interest-rate-collars/ With regard to tax, although either method is fine, generally it is better to subtract the depreciation, calculate the tax, and then add it back. (Whether you show it as separate workings doesn't really matter). There are three reasons for doing it this way. Firstly, it is easier when it is international (and there is extra tax in the home country). Secondly, if there are tax losses (which is rare, but has happened) then the tax is zero but the loss is subtracted from the following years profit (and in this case you do need to show the workings separately). Thirdly, the current examiner always assumes that extra investment is needed in non-current assets each year of an amount equal to the depreciation. So with this assumption, instead of adding back the depreciation and then subtracting the same amount as a cash outflow, he just doesn't add it back :-)

Thank you

You are very welcome :-)