Whenever I have a question regarding these options, I will just take a “shortcut” and for example do the following: I have a loan with a floating rate and the spot rate is = 5%, I have a put with strike price = 6%. I will just calculate my interest received as 6% and not calculate the interest from the loan and the payout from the option separately. Do you think that may be an issue in the AM session?
I believe that you’ll be perfectly fine.
I’ve asked them analogous questions in the past, and they’ve always said that if your calculations are correct – even if you don’t follow their methodology – you’ll get full marks.
Thank you!
You’re quite welcome.
EuroBill would you mind elaborating? I always love a shortcut, and have always done these questions the long way…
well let us say that I have a loan with you, i.e. you owe me money, and I get a floating rate from you.
say that the rate at today’s reset date happens to be 5% but I have bought a put option with a strike price of 6%.
The long way would be to calculate 5% * Notional Amount * (Actual/360) that I would get from you + (6% - 5%) * Notional Amount of Option * (Actual/360) that I would get from the option.
I always just go straight to the 6% instead of taking these two steps when I want to calculate the effective interest.
-> 6% * Notional amount * (Actual/360)
That’s it.