The current LIBOR rate is 4%. Which of the following interest rate collar will have the lowest cost?
A) buy interest rate put at exercise rate of 3.0%, sell interest rate call at exercise rate of 4.5%
B) buy interest rate put at exercise rate of 3.0%, sell interest rate call at exercise rate of 5.0%
C) buy interest rate put at exercise rate of 4.0%, sell interest rate call at exercise rate of 5.5%作者: lcai 时间: 2011-7-11 19:21
A...........low exercise for put mean lower cost to buy
low exercise for call mean more money collected from sale
i am somewhat troubled by the current libor quote tho作者: NakedPuts00 时间: 2011-7-11 19:21
Originally posted as "B", the answer is "A".
I have three weeks to figure out how to read questions more carefully.
Edited 1 time(s). Last edit at Saturday, May 14, 2011 at 10:53AM by BTON04.作者: aidebaobao 时间: 2011-7-11 19:21
I think this question is best solved by elimination
First off, you can rule out C because buying ATM put (this is where knowing current LIBOR helps) is going to be more expensive than buying a put at 3% strike (OTM).
So, the puts in A & B will cost you the same amount as both have 3% strike.
On the short call side, you will make more premium by selling a call that is deeper in the money. i.e. selling a call at strike 5% will fetch you more than a call at 4.5% (given current LIBOR is 4%)
Therefore, my answer is
B作者: ohai 时间: 2011-7-11 19:21
CFASniper Wrote:
-------------------------------------------------------
> I think this question is best solved by
> elimination
>
> First off, you can rule out C because buying ATM
> put (this is where knowing current LIBOR helps) is
> going to be more expensive than buying a put at 3%
> strike (OTM).
>
> So, the puts in A & B will cost you the same
> amount as both have 3% strike.
>
> On the short call side, you will make more premium
> by selling a call that is deeper in the money.
> i.e. selling a call at strike 5% will fetch you
> more than a call at 4.5% (given current LIBOR is
> 4%)
>
> Therefore, my answer is
>
> B
sniper hold on soldier which is more valuable to you a call @ 4.5% or a call @ 5%?
i would think a call @ 4.5 no作者: strikethree 时间: 2011-7-11 19:21
agree with you...Call@4.5 is more valuable than call@5.0% and will bring more premium. answer shud be B...作者: mar350 时间: 2011-7-11 19:21
pimpineasy Wrote:
-------------------------------------------------------
> CFASniper Wrote:
> --------------------------------------------------
> -----
> > I think this question is best solved by
> > elimination
> >
> > First off, you can rule out C because buying
> ATM
> > put (this is where knowing current LIBOR helps)
> is
> > going to be more expensive than buying a put at
> 3%
> > strike (OTM).
> >
> > So, the puts in A & B will cost you the same
> > amount as both have 3% strike.
> >
> > On the short call side, you will make more
> premium
> > by selling a call that is deeper in the money.
> > i.e. selling a call at strike 5% will fetch you
> > more than a call at 4.5% (given current LIBOR
> is
> > 4%)
> >
> > Therefore, my answer is
> >
> > B
>
>
>
> sniper hold on soldier which is more valuable to
> you a call @ 4.5% or a call @ 5%?
>
> i would think a call @ 4.5 no
But you are SHORT that call, Seargent!!!作者: bboo 时间: 2011-7-11 19:21
exactly so u make more money from it so hence the collar will have a LOWER cost
Edited 1 time(s). Last edit at Saturday, May 14, 2011 at 01:39PM by pimpineasy.作者: Colum 时间: 2011-7-11 19:21
Since you are short the call, its more valuable to the purchaser so it you gain more from the initial sale.
Since you are buying a put with a lower strike, it will cost less.
Thus its the lowest cost collar in terms of setting it up initially.作者: bodhisattva 时间: 2011-7-11 19:21
hooray for cfasniper作者: bpdulog 时间: 2011-7-11 19:21
Good analysis , I got fooled too , and selected B . Should have read the q slowly.作者: liangfeng 时间: 2011-7-11 19:21
One of the best questions I have seen here in a while.
so hence the collar will have a LOWER cost