2015 Mock Afternoon Q 40

CFA Level III Derivatives
#1

I did not get the efffective interest rate calculations. Can anybody help?

#2

anybody?

#3

Post the question?

Basically you want to calculate 3 things

  • FV of option premium (A)
  • actual loan interest (B) - use xxx/360 days
  • option payoffs ©

And depending on if you are borrowing or lending, there are 2 formulas to use for effective interest rate

Borrowing:

(Principal + B - C) / (Principal - A) = R

Lending:

(Principal + B + C) / (Principal + A) = R

Annulaize the result R^(365/xxx) then that’s your answer

It’s easier to play the scenario in your head to understand the formula instead of just memorizing it.