Interest Rate Options - Effective Loan amount with Calls vs. Puts

This is something that hurt me in Sample 2. With regard to interest rate options, why, when calculating the base amount off which the effective interest rate will be computed, do you ADD the cost of puts and SUBTRACT the cost of calls? For example, if you have a loan to be made in 30 days on $1,000,000, you would calculate the FV of a call option you want to buy and subtract it from 1,000,000. The opposite is true with a put, you would calculate the FV and ADD it to the 1,000,000. I don’t understand this at all. Any help is appreciated.

You don’t own the call option, if it increases in value your bond loses value. You own the put option, if it increases in value you gain

what do you mean? where in Sample 2?

cpk123 Wrote: ------------------------------------------------------- > what do you mean? where in Sample 2? I don’t know the question number, but it was where you had to construct a collar with a call that had a 100,000 premium and a put that had a 130,000 premium.

sample or mock?

cpk123 Wrote: ------------------------------------------------------- > sample or mock? Sample.


cpk123 Wrote: ------------------------------------------------------- > cfa? Yes. I just checked. Sample 2 Question 20.

looks like there are different samples… provided to different folks. do not remember seeing anything with a Interest rate option on my 2 samples.

“New Level 3 Version 2 2010 Sample Exam - v8” That’s what shows up in my testrac. Regardless, mind taking a shot at the answer? You’ve always had all the answers in past years.

level 3? we are all still doing Level 2, cube!

Whoops…wrong board =P

thanks, but no thanks for giving us all a heart attack!