R28 Options Risk Management - Put - Effective Interest

CFA Level III Derivatives
#1

Hi guys,

example 12 of the curriculum adds the spread over libor when calculating the compounded option premium. I do not understand why this 100 basis points spread is added knowing that the loan will be provided to a customer to which the 100 basis points would apply. To me, the bank is not paying this extra 100 bps and therefore the compounded option premium should exclude this spread. Can somebody explain the reasoning?

Thanks!

#2

Isn’t it because that’s the rate they would potentially earn on the money if loaned out?

#3

i guess so