# Sample exam 2 Interest rate option

If a borrower buys a collar or cap/floor you subtract because in essence the cost is coming from the borrowings. (ie, if you borrowed 10,000 and the collar cost 1000, it’s like you actually borrowed 9000). if an issuer buys a collar or cap/floor you add it to the loan because in essence you need to get return on the option and must consider it as part of the loan. (ie, you lent 10,000 and a floor cost you 1000, it’s like you actually lent 11,000).

whystudy Wrote: ------------------------------------------------------- > the put you have to pay as you are long the put > -\$130 000 and short the call, and recieve +\$100 > 000, so the collar gives you a net of -\$30 000. > with the interest it’s going to be \$31 050. > > the answer should be [(60 000 000 + 2 400 000) / > (60 000 000 - 31 500)] ^ 360/180 - 1 > which will be around 8.273% or so. > > anyways, i now worked out everything and > understand more than ever. The answer provided is > wrong and I am moving on. The above answer is almost right - except for the denominator. To get the signs right, it is easier to think of these cash inflows and outflows. Loan to a outside party is an outflow in the beginnng and inflow when paid back. Also put premium over call premium is an outflow as it is a cost. Thus, denominator should be added not subtracted. So it should be [(60 000 000 + 2 400 000) / (60 000 000 + 31 500)] ^ 360/180 - 1 ie 8.05 (the q asks us to to 30/360 convention; if 365 days is used it is 8.16)