Topics Test - Mink (Derivatives)

Mink is managing risk for Casford Bank. So I am assuming this is a lender becuase it is a bank. Then, we need to buy put and sell call to keep the receipts within the two rates, right?

However, in Question 4, they mentioned “any upside after a Libor of 6% is captured by the buyer of the call, and the floor is established at a Libor of 4.5%, the exercise rate for the put.”

So, they are using a long call + short put. Because they are a lender, why they didn’t long put and short call?

Thank you!

They do not use long call. They use long put + short call and that’s exactly what says in question. “Any upside is captured by the buyer of the call” and this is not the lender than other party.

Thanks, Flashback!

  1. Are you saying buyer of the call = short call? If so, how can the buyer be on the short side?

  2. Why this is not the lender situation? If it is not, do you mind providing an simple lender situation. I think it has been a while I have seen a lender question.

  1. Buyer of the call is long call, seller of the call (the Bank) is short call.

  2. This is a normal lender situation. You did not read carefully. It is all about Bank and its loan protection but each question from different aspect.

I see. Thanks a lot!

They mentioned the buyer of the call, so I thought they meant for the bank which confused me at first. Now it makes sense now.