aidebaobao

jorgeam86 Wrote:
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> Pg. 443 of cfai volume 5 states a cAse where a
> bank buys a interest rate put to hedge a floating
> rate loan to be made. It states the bank has
> secured fixed rate financing in order to originate
> the loan which will be made at libor+100bps My
> question is, when calculating the option cost, why
> do they incorporate the 100 spread on the fixed
> rate loan since the bank is borrowing at a fixed
> rate? Im thinkig it's to incorporate the
> opportunity cost associated with buying the
> option? It just doesn't make sense tO me since the
> bank is borrowing at 7.125 fixed not the latter
> plus 100

Opportunity cost of being able to lend the funds at the full rate.

Even if they are borrowing at 7.125 they could lend at XXXX which is >7.125.