Interest Rate Collar - CFAI Derivative Mock Mink

CFA Level III
#1

Question summary: On 1 Jan, a bank want to put a collar on its $60m loan, due 1 year from 1 Jan. Loan is 180day Libor+2%, semi-annually. Libor (at t=0) =5%

Collar: Call strike = 6%; Put strike = 4.5% (call = 100k, put =130k). Reset every 6 months.

Question 3: Given a 180-day spot Libor of 6.0% on the 30 June reset date, what is the effective interest rate at the reset of the loan under the assumption of a collar constructed from the loan and the options?

The answer is calculated based on Interest amount / Amount paid out by bank on 1 Jan.

I understand denominator. However, for numerator: they use (6%+2%) instead of (5%+2%)

Why reset rate is not based on Libor at 1 Jan as in example in the cirriculumn (Exhibit 19 of relevant reading)? 1st payment should be based on current libor rate instead?

Do I miss anything? Thanks!!!

#2

the rate is current on the date the loan is taken out. In this case it is 6+2

#3

I didn’t read the question. But am answering based on the information in the OP.

The loan is due one year from jan. semi annual resets. June’s rates will be effective on the start of the loan period.

#4

ah… got it. mixed up reset periods.

Thanks both!

#5

Q 3 why the libor rate taken is 6%, we are supposed to take the last libor rate right? which is 5% ??!!

Can anybody explain?