The question asks to compute the effective interest rate when loaning out LIBOR+spread and using put option to protect against decrease of interest rate.
I got the 6 month return rate right, but I annualized the rate by (1+r)^2-1. The provided answer and textbook examples used (1+r)^(365/180)-1.
Can someone explain the day count convention here? The question specifically states the day count convention for the option is 30/360.
Thanks! |