Today is July 1 and the next payment dates are October 1, January 1, April 1 and July 1. Current LIBOR is 4.2% The strike rate is 4.5%. The values of LIBOR for the next three payment dates are 4.6%, 4.4% and 4.6%. Would there be a payoff from the floor on October 1. Thanks.
no
could you elaborate a little. thanks
Yes… becasue the payoff is based off the current 4.2% LIBOR rate, correct?
Hmm… I thought there will be a payoff because this is a floor and the strike is above the underlying?
jimmy, i thought assumption is you are entering floor today. Today floor will have a floorlet that expirse on october 1, but payoff from this floorlet will be on January 1
csk, i agree but this seems to be another dicrepancy between cfai and schweser
i wouldnt be surprised, or Schweser assumed you already entered into floor
the first pay off will be on April 1 based on January 1 LIBOR of 4.4%
donag Wrote: ------------------------------------------------------- > csk, i agree but this seems to be another > dicrepancy between cfai and schweser yes, cfa uses fixing x months from now, and settlement x months afterwards schweser uses fixing now and settlement x months from now
I read it as the first settlement will occur in October. Therefore, the payoff, if any, is based on the July rate. Since the July rate is less than the strike, there should be a payment: (4.5%-4.2%)(90/360)*NP
volkovv Wrote: ------------------------------------------------------- > the first pay off will be on April 1 based on > January 1 LIBOR of 4.4% today is July, so payoff will be January 1 based on October LIBOR
if you use cfa text: + no settlement in october + in october you fixed LIBOR, which is higher than floor strike, so no payment will be done IN JANUARY + in january, you fixed LIBOR, which is lower than floor strike, so you will have a payment IN APRIL
OK. I thought this waas just an existing floorlet. I didn’t realize you were saying that you entered the contract on July 1. It makes sense that you wouldn’t qualify for an October payment in that case.
hala_madrid Wrote: ------------------------------------------------------- > if you use cfa text: > > + no settlement in october > > + in october you fixed LIBOR, which is higher than > floor strike, so no payment will be done IN > JANUARY > > + in january, you fixed LIBOR, which is lower than > floor strike, so you will have a payment IN APRIL yes, you are correct, no payment in JANUARY
comp_sci_kid Wrote: ------------------------------------------------------- > hala_madrid Wrote: > -------------------------------------------------- > ----- > > if you use cfa text: > > > > + no settlement in october > > > > + in october you fixed LIBOR, which is higher > than > > floor strike, so no payment will be done IN > > JANUARY > > > > + in january, you fixed LIBOR, which is lower > than > > floor strike, so you will have a payment IN > APRIL > > > yes, you are correct, no payment in JANUARY and yes, i would miss it on exam, cause i wouldnt pay attention that option expirse OOM. That is me, and my lack of attention
don´t worry csk, they would ask for the number, not “if there is a payment or not”, and you would get it, I am sure
hala_madrid Wrote: ------------------------------------------------------- > don´t worry csk, they would ask for the number, > not “if there is a payment or not”, and you would > get it, I am sure Nah, i wouldnt that is my weakness. I might now theoretical underpinning but when it comes to just crank the numbers i always make mistake
if schweser got this wrong, i am toast.
no worries csk, making mistakes here is harmless 