effective interest rate of Collar

CFA Level III Derivatives
#1

Hi fellows, I have a question from the CFA Website item set, Application of Derivatives - Mink, the 3rd Question,

Given a 180-day spot Libor of 6.0% on the 30 June reset date, what is the effective interest rate at the reset of the Texmaco loan under the assumption of a collar constructed from the loan and the options described in Exhibit 2?

why the Interest on loan = $60,000,0000.06 + 0.02? the reset date is 30 June, why we should not use the LIBOR on 1.Jan (5%+0.02) to calculate the Interest on loan on the reset date of 30 June? the official answer should be the interest on loan on 30 Dec, right?

#2

Because LIBOR spot rate was 6% on 30/06 as stated in question.

#3

the loan starts at 30 June, so you use the LIBOR on 30 June.

#4

Those are interest in arrears, a floating rate based, not utilized ex ante as fixed loan interest.

#5

Loan did not start at 30/06 than on 01/1.

#6

how do u know that?

it says “an upcoming reset on a floating-rate loan Casford Bank made to Texmaco” plus "

Next reset

30-Jun

"

i think the loan should begin on 01 Jan?

#7

hi, can u pls explain a bit in details?

if we stand on 30.06, the reset date, we should calculate the interest on loan using the Libor covering from 01.01 to 30.06 which should be 5%+200bp. right?

thanks!

#8

The question starts like that: “Given 6 % LIBOR on 30th June…”. What else should I consider? Everything is straightforward.

They even helped with such formed question. They might put LIBOR on 30/06 somewhere in table among all other data instead.

Next reset means that interests are paid in arrears, on spot LIBOR prices at each reset date what means loan starting LIBOR on 01/01 is irrelevant.

#9

The loan resets on June 30th, so the rate taken into account is 6%.

My question here is that in the premium calculation, the answer shows

My q here is why there is a second term in this equation?

#10

I use Safari and cannot see picture you posted. Can you simply copy-paste?

I guess you mean on margin (+bps) over LIBOR. It is always used in premium compounding calculation by CFAI.

#11

let me ask this way, is this a collar or not?

on schweser notes book 4 P192, it calculate the interest on loan using the Libor(t-1)

#12

I think this CFAI question was related on collar based on IR Put and Call and you are maybe talking about IR caps and floors. You may distinguish those by asking for premium compounding which is a characteristic of first one. As I remember Schweser well covered both by many BBs. I cannot check now.

#13

thanks a lot!