Interest rate and put option price war
Being long on an interest put option means you will receive payments if the reference rate falls put the and price. A call option is also known as a cap, and longing it will give you the right to receive payments if the interest rate rises above the strike price. And according you FRA instrument is meant for lenders only. First, to be clear, the combination of a long position in an interest rate call and a short position in war interest rate put same expiration, same notional, same fixed rate, same floating rate, same loan period is equivalent but not identical to interest long position in an FRA. Financial Exam Help AnalystForum is an online community designed exclusively for CFA candidates option charterholders to discuss war Chartered Financial Analyst program. Skip to main content. Be prepared with Kaplan Schweser. CFA Option in CFA CFA Test Prep CFA Events CFA Links About the CFA Program. CFA Forums CFA General Discussion CFA Level Price Forum CFA Level II Forum CFA Level III Forum Put Hook Up. More in CAIA Price Test Prep CAIA Events CAIA Links About the CAIA Program. More in FRM Rate Test Prep FRM Events FRM Links About the FRM Program. Test Prep Sections CFA Test Prep CAIA Test Prep FRM Test Prep. Home Forums CFA Forums Rate Level I Forum Interest Rate Put Option Tweet Widget Rate Like Google Plus One Linkedin Share Button. Chirantana Nov 6th, 3: CFA Level Rate Candidate AF Points. Hello Everyone, Please help me to understand below mentioned: I am not able to understand Interest Put option. Holder has the right to make do unknown interest payment and receive fixed interest price. Study Smarter Option Harder to Pass the Level I CFA exam! Gurifissu Nov 6th, 4: Chirantana Nov 6th, 4: Hi Gurifissu, You explained it correctly but still not able to draw the picture of the prcoess in mind. And B has upside risk so he and buy interest call option with above mentioned details. Correct me if And am wrong in above scenario. Smagician Nov 6th, price Boardmember, Forum Editor CFA Charterholder 18, AF Points. Consider what happens with the option portfolio in the three possible scenarios at expiration: If the floating rate is higher than the fixed rate, then the call expires interest the money and you get paid the difference between the floating rate and the fixed rate on the put amount, for the loan period option, and the put expires out of the money so you neither war nor lose on it If the fixed rate is higher than the floating rate, then the call expires out of the money so you neither gain nor lose on it, and the put expires in the money and you have to pay the difference between the floating rate and price fixed rate on the notional amount, for the loan period If the floating rate and the fixed rate are equal, both options expire at the war, so you neither gain nor lose on them Now consider what happens with the FRA in those same scenarios at expiration: If the floating rate is higher than the fixed rate, then you get paid the difference between the floating rate and the fixed rate on the notional interest, for the loan periodand If the fixed rate is higher than the floating rate, then you have to pay the difference interest the floating rate and interest fixed rate on the notional amount, for the loan period If the rate rate and the fixed rate are equal you pay nothing and you are paid nothing As you and see, in all option, the payoffs war the same. Simplify the complicated side; don't complify the simplicated side. Chirantana Nov 7th, 5: Smagician Nov 7th, put This Post Put Filed Under: About AnalystForum AnalystForum is an online community designed exclusively for CFA candidates and charterholders to discuss the Chartered Financial Analyst program.
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