Schweser Exam 3 Afternoon Session Q18.2 pp178 represents, effective, borrowed

mfleming1983

Hope someone can confirm this. Thanks.
Question.
Is the call premium paid now since we need to compute the FV of the premium to work out the Annualised effective rate for the 180 day loan?
Basically the working assumed it is paid now once you purchase the call option, and assumed you borrowed it at the current 90 day LIBOR + spread of 1.5% (this represents the “effective interest cost of the call premium”).

jbaldyga

The call premium is paid “now” but to calculate the EAR of the loan taking into account the cost of the option you must take the FV of the option premium at your current lending rate.
Which part are you struggling with:
-why you use the current rate to get the FV of option, or
-why you take into account the cost of the option