# CFAI Derivatives Topic Test (Mink) - Collar

Can somebody please explain why on Number 3 in this topic test that you add the difference between the cost of the call and put to the total loan in the denominator of the effective annual rate equation? All questions like this that I have done have required you to subtract the cost of the options from the loan amount in the denominator. Not surprisingly, answer option A was the answer I got by subtracting which is wrong. I’m sure I’m just missing something simple. Thanks.

I could take the time to explain, but you’re still likely to answer incorrectly on the exam.

#McScrewIt

Yes. Good. Let the rage flow through you.

The rational is, you’ve got a loan lets say 100 usd and you pay 10 usd of interest ok? (ill try to make it simple)

Then, if the interest is variable, suppose you buy an option in order to protect against a movement in the interest rate ok?

Then, how much is your loan? your loan is now equal to the initial borrowed funds + the cost of the protection (options)

Also you adjust your interest payments, which are equal to the initial structure of the loan adjusted for the part of the option (if it applies, i mean if they are in the money).

With both the adjusted interest payments and the adjusted loan, you calculate the effective interest rate.

I didnt make calculations, i tried to explain it to you, now go and see the textbook or practice answers and see if now the structure of the answer makes more sense to you.

Jorge

That’s funny… tell you what: On the Friday just before Memorial Day weekend, in your honor, I’ll take a moment to look at the framed CFA charter in my office and think about how jealous I’ll be… forced to enjoy the extended weekend, hanging out with friends – while you have to cram/study in hopes you’re not among the half of test takers that will invevitably fail.

#LuckyYou

Thanks Jorge. Realized it was a simple (dumb) mistake. If lending and purchasing a put, then add it to the denominator. If borrowing and purchasing a cap, subtract it from the denominator.

PS how sweet is hashtag though? Spending his days trolling CFA candidates on a forum somewhere lol.

Not trolling, just picking on stupid posts.

#likeyours

Well, he’s just posting comments, sometimes he answers questions (indirectly), he just thinks that many things can be answered without asking them here, but anyway we’re all here to help us.

Good luck

Jorge