In the problem on calculating a firm’s effective borrowing cost when using an interest rate call option, the future value of the call premium is subtracted from the amount to be borrowed. What I don’t understand is, why is the future value of the premium taken for an interest rate call and NOT for a stock option? i.e. the profit on a call option on a stock is max(S-X,0)-C. Howcome in this case it’s not max(S-X,0)-FutValue©? In the same spirit as the interest rate call calculation, shouldn’t we be taking the future value of the premium on a stock option as well? Thanks ahead for the help!
^I had the exact same issue and was on a heated debate with a friend also taking L3. No solution yet. Will have to suck it up and know the steps of how it’s done.
it is because the dates are different. you have 1. the decision date that you determine buy option or not, 2. the measurement date that you are valuing your strategy, 3. the actual loan start date, 4. the loan end date which is also the interest and principal payment date. if you don’t buy the option (pay the premium), you will borrow on day 1 of the loan. tvm need to be calculated for the holding period of the option. however, if it is a multiple choice, i will not bother with that since the diff is always min