CFAI MOCK 2015 (afternoon) - Q40

CFA Level III Derivatives
#1

The solution to Q40, CFAI Mock 2015 (afternoon session), calculates effective interest as

= Principal * Rate * number of days/360 + (Spread - Exercise Price) * Notional Princpal (with no time adjustment)

Why is payoff calculated with no time adjustment? In the schweser books, the example also shows a time adjustment done for the payoff from the derivative. Logically also, the payoff should be prorated for the time period it pertains to.

Could someone please advise? There are so many inconsistencies!

#2

Actually they do adjust the both components ( the loan and the collar) with no. days/360, look at the brackets:

Principal*182/360 [% interest paid on loan + %interest paid on collar]

#3

Shouldn’t we use (183/360) on 30-June-13 if we are calculating payoff on 31 December 2013 ?

#4

You use the rate at the last period but the days in the current period.