Specifically referring to SChweser examples:
How come the LIBOR used to calculate interest and call option payoff are the same?
Isnt rates based on LIBOR suppose to be from previous settlement date while payoff on the option the current LIBOR?
Please help me. Please.
are caps and floors reference rates from previous settle LIBOR or current LIBOR?
It should be the same.
The LIBOR rate to determine the payoff from the call option and the loan amount will be determined on the day the loan is taken out.
The difference is the payoff from the option will be
Max(LIBOR Rate- Strike Rate) x ( period)/360 X NP
The amount to be paid back from the loan will be NP X(1+(LIBOR +SPREAD)X(period/360))
SO THE PAYOFF FROM THE CALL OPTION DOES NOT DEPEND ON THE SPREAD