Re: Derivative Questions

[Ratan Gupta, FRM]

Q1. In cap, there is no extra payment which is to made if the interest
rate exceed CAP.
You can think of it that the borrower is getting paid by the lender.

Q2. Issuer of note/bond is always the borrower.

Q3. The formula is wrong for Short.
I derived it for Long in the equity class, request you to derive the
same way for short.

Thanks
Ratan

On Feb 16, 3:30 pm, Geetha Vramani <vramani.gee...@gmail.com> wrote:
> Hi Ratan,
>
> I have following questions, please advise
> __________________________________________________________
>
> Q1) When LIBOR rises above 10% (cap level), the cap will make a
> payment to the cap buyer to offset any interest expense in excess of
> an annual rate of 10%.
> Does this mean that the borrower will get pay-off from lender?
>
> __________________________________________________________
>
> Q2) Who is a floating rate note issuer- lender or borrower?
> __________________________________________________________
>
> Q3) In margin call calculation - Please confirm the below short
> position
> formula: While solving CFA material problems, I saw that for short
> the
> below formula gives the answer -
> Long position we use MC = P (1-Initial Margin) / (1-Maintenance
> Margin),
> Short position using MC = P (1-Maintenance Margin) / (1-Initial
> Margin)
> __________________________________________________________
>
> Thanks,
> Geetha