effective annual rate of call/put option

CFA Level III Derivatives
#1

why do we add (deduct) the option payoff and FV of premium option when computing for the effective annual rate of a put (call) option?

#2

  1. The option payoff offsets the interest received or interest paid… That obviously affects the “effective” interest rate, which is the bottom line. For example, if you pay $1500 mortgage a month but uncle joe credits you $500 for being a good boy each month, you might consider that you really only pay $1000 effective mortgage a month… That would be your effective rate.

  2. The FV premium is a cost that you need to factor into the base aka principle. You add to the base if you’re lending and subtract if you’re borrowing.

#3

Knowing whose perspective the options are does make sense. Thabks!