- 10 Marks
FM – L2 – Q101 – Hedging with options
Calculate min net interest rate cost for a company borrowing $5m using options with a strike price of 94.50.
Question
It is May and a company intends to borrow $5m for 3 months commencing in September. Options are available on 3 month Canadian interest rate futures with a strike price of 94.50 and are quoted as follows:
| Expiry month | Calls | Puts |
|---|---|---|
| June | 0.10 | 0.31 |
| September | 0.46 | 0.67 |
| December | 0.63 | 0.84 |
The contract size of the 3-month Canadian interest rate future is $1 million.
Required
Calculate the minimum net interest rate cost for the company if it hedges using options with a strike price of 94.50.
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