hey people, i cant understand why they took the number of days as 365, there is no mention in the question anyway… Question ID#: 95455 Consider a call option expiring in 60 days on a non-dividend-paying stock trading at 53 when the risk-free rate is 5%. The lower bound for a call option with an exercise price of 50 is: A) $3.40. B) $0. C) $3.00. Your answer: C was incorrect. The correct answer was A) $3.40. 53 − 50/(1.05)60/365 = 3.40.
Whenever, you are annualizing/de-annualizing a return, you ALWAYS use 365. 360 is used with Bank Discount Yield and Money Market Yield. These are specific NAMED yields. 360 is used with Bank Interest rates in USD and LIBOR. For practically all other calculations, use 365, unless otherwise mentioned in the question. Someone correct this generalization, if not correct.
+1 ^ rus1bus, please do something about this quotes convention to help the community.
Thanks guys…that helps
revenant, sorry I did not get exactly what you mean by quote convention. Can you please elaborate. Also, Banking systems in different Currencies use different day conventions to calculate interests. In some currencies (e.g. USD), they use 360 days per year to calculate interest and in most other currencies they use 365 days a year to do interest calculations. Most software that do interest calculations, let you enter the day convention for that transaction before they calculate interest figures for you. So, which day convention to follow is specific to which currency is used in a transaction. Hopefully some day in future, all currencies will follow one standard day convention. But annualization of any rate given for a period of less than a year, is always done using 365 days convention, irrespective of the underlying currency.
The reason they still use 360 days for some quotes such as the 2 yields you mentioned are due to some convention that they used since initiation and have never change it. At least this is what the schweser video prof said.