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Can anyone tell me why we use futures price to calculate gain from Interest rate Options ?
For ex: We got a Put Option
Strike Price: 96 (4%)Market rate at the time of borrowing: 7% (93)
Say, futures rate at the time of borrowing = 93.5 (6.5%)Here, instead of calculating Gain from Option by 7% – 4% = 3 % we actually calculate it by (futures price) 6.5% – 4% = 2.5%
Why are we doing this?
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