schweser book 4, p158 - 164 when calculating dollar interest cost, FV of option premium, use 360 days a year, but, when annualizing the resulting rate, use 365 days a year. Why is that? is it an industry standard?
its to fack with ya.
hahaha … funnest thing I’ve read all day … I think it’s because when discounting the option premium you’re using LIBOR + spread (use 360 days with LIBOR), and when you’re calculating the EAR you’re comparing it to Treasuries which use 365 days. At least that’s what I remember from Level 1.
but, they even do it for a plain case with no option involved (i.e. without hedge). if that’s how bank calculates EAR, someone can hand over 4 quarterly to bank and ask the bank to pay EAR to make extra 5 days. no?
Flip a coin…take a pick.