Interest Rate Options Caps, Floors and Collars - CA Final SFM (New Syllabus) Classes
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- Опубліковано 16 гру 2024
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Interest Rate Options:
These are such derivative contracts where the holder of Interest Rate Options has a right but no obligation for borrowing or investing money at a pre decided interest rate.
For example, X Ltd. has been given an option by HDFC Bank to borrow $ 20,00,000 after 6 months for a period of 3 years at 12% per annum irrespective of prevailing interest rate.
In the above example, X Ltd. has a right and not an obligation to borrow after 6 months at 12% per annum. X td. Is holder of such Interest Rate Option and would have definitely paid premium for such option. X Ltd. will exercise this option only when such option is In-the-Money.
An Interest Rate Option is considered In-the-Money (in case of borrowing) when the prevailing interest rate in the open market is higher than the interest rate as per the option.
Caps, Floors and Collars:
X Ltd. is offered by its bank an interest rate option, according to which X Ltd. can borrow at its choice a sum of $ 1,00,000 after 1 year at 12% p.a.
After 1 year if prevailing interest rate for borrowing is higher than 12% p.a., X Ltd. will exercise this option of interest rate and will borrow at 12% p.a. irrespective of actual interest rate.
Y Ltd. is offered by its bank an interest rate option, according to which Y Ltd. can deposit at its choice a sum of $ 5,00,000 after 1 year at 8% p.a.
After 1 year if prevailing interest rate for deposit is lower than 8% p.a., Y Ltd. will exercise its option to make deposit at 8% p.a. irrespective of actual interest rate.
In the above given two examples, X Ltd. is willing to borrow and has risk of interest rates rising up. On the other side, Y Ltd. is willing to invest and has risk of interest rates declining.
Holding an interest rate option to borrow at a specified rate as given in case of X Ltd. as 12% p.a. provides protection to X Ltd. against upward movement of interest rate. Using such option, X Ltd. can borrow at prevailing interest rate or 12% p.a., whichever is lower. This option can fix an upper limit to interest rate. Such options are called “CAPS”.
Holding an interest rate option to invest at a specified rate at the option of the holder as given in case of Y Ltd. as 8% p.a. that protects the investor from downward movement of interest rate. Using such option, Y Ltd. can invest at prevailing interest rate or 8% p.a., whichever is higher. This option can fix a lower limit to interest rate. Such interest rate options are called “FLOORS”.
A combination of ‘CAP’ and ‘FLOOR’ can create a “COLLAR”.
The purchaser of a Collar buys a Cap and simultaneously sells a Floor. A Collar has the effect of locking its purchases into a floating rate of interest that is bounded on both high side and the low side.
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NJ sir i feel bad that i didnt knew about you when i took my classes .. i got so much conceptual clearity from you.. would definitely recommend you to everyone
I have watched many teachers but your teaching style is love ❤️. No glitches, no time pass, and flawless. No extra questions and to the point. Thanks a lot sir
Edited: Please focus on marketing sir, I bet, you will beat others.
I haven't seen someone as flawless as NJ sir....greatest conceptual clarity that too in such a lucid manner...really appreciate your work sir....and these videos are definitely bonanza for Revamp buyers....all these videos are easing up exam pressure....thankyou sir😊✌
Totally agree...
Thanks Ankit, I shall keep it up...
How can someone explain ca final sfm concepts so flawlessly, amazing. Thank you 😊❤️
You're welcome 😊
Your teaching skill are awesome most importantly you understand the concept at a very basic level that I like about you keep it up
The ultimate for the conceptual clarity and a must watch for smooth journey for absorbing the concepts without any impending doubts... Thanks a lot sir.
Thanks sir
I got a very clear and conceptual clarity in this topic...
I am a ACCA student and haven't got such clarity even from study material and my video classes..
Acca student: Had trouble understanding how interest rate collars worked. This video explained the working beautifully. Gratitude to you Sir.
Very very useful videos, with great fluency without wasting any time making concept crystal clear
A different level of teaching, wonderful
Thank you very much sir
You are most welcome
Hello Nikhilji, your video is very impressive. I am a CA, and an ACCA and CIMA coach. Your explanation of one of the tough topics in Interest rate risk management is the best.
Watched your many videos to get conceptual clarity and each of the video of urs is amazing sir. Helps a lot in lockdown. Thank you so much
You are most welcome
" Thank you so much Sir, For all your lectures. All the difficult concepts you're explaining in such a way that students can really understand!
Very helpful and nice video
The best thing i like about sir was he was very much precise in the words that he used.
Great help sir 🙏
I haven't seen anyone teaching SFM concepts with such great ease ,yet sooo clear❤️
Happy to help
U explained every topic such a way we fall in love with every topic sir 🧡🧡🧡🧡🧡
Thank you so much Sir👍
You have made every concept which seems difficult very easy!! You are the best!!!
Most welcome 😊
I understood the concept so well thanks a lot for making derivatives so easy sir 😊.
Sir bohot acha tha ..
I m regretting now that why I wasted so many years without learning sfm from you sir
Itni simple hindi me ye concept samjha Dia hai aapne..
It's not like I don't know English..m from English medium school..
Still jo concept hindi me relate ho jaata hai wo engish me nahi hota
#connectionissue
Thank you so much sir you explain this concept so easily
very well explained with 0 ambiguity.
Bohut acche se samjhme a gye sara concept..thank u so much sir ,
Thanks Pradipta
Just fabulous!!! U have taught in such a easy way... thanku soo much sir
No more doubts...Thank you so much sir.
Always welcome
Sir
Really Your teaching style is excellent
Thank you very much sir for clear the all concept about this topic and I truly appreciate you as well as I enjoyed every minute of your lecture
There is a suggestion. Please try to reach as much as possible you are to good to join your classes.
Q 106 @ 9:30 Sol 16:56 to 21:14
Sir, Clarity of concept explained by you is quite amazing.
Hope you Will continue sharing such kind of video
Thank you so much sir, now am good with concept clarity.
Thanks for the video! Quick question- why would bank want to buy a CAP? thought they will only buy FLOOR to keep the Interest above certain value?
Hello Sir, i am happy finding your lectures but please make this videos in English so that we can keep up as i am only relying on the notes shown but you are explaining(i quite don't understand the language) . Love from Tanzania
Concepts made clear
Sir, kindly post video of cap and floor concept in English
Sir pls post this in English
Lord of FM
Sir should the LIBOR rate be compared with CAP and FLOOR instead of total of LIBOR + 0.50 %?
Sir in question no 106 the question mentioned as "issuing" a loan but why XYZ is "paying " interest? and another doubt is why did they enter into both cap and collar when are are just lending a loan?
I have got the same doubt
Hope sir will reply
As he said in one of the comments, issuing of loan here is issuing a debt instrument, let us assume a Bond. So obviously the issuer(XYZ) has to pay interest. He is buying a Cap option (to fix an upper limit to the interest rate he will pay) and selling a floor(thereby promising the Bond holder that he will always pay an interest above the floor rate). Both combined became a Collar strategy. I hope you understood :)
sashank challa I think it’s the other way around, issuing a loan ( which decreases Cash reserves) is not like issuing a Bond ( which increases the Cash reserves) so with that said, buying a Cap is not making sense. I agree with ur example though but that’s not the example used here in my opinion
Sir this solution updated by ICAI they are taking time period from dec to June which comes to 181 days ....
Can anyone give link of option strategy (straddle & strangle)?
Osome way of teaching sir..
Thanks a lot sir, this is really helpful.
Best and Classic 👍👍👍👍
Thank you so much sir ..
Great Explanation Sir...! 👍
You're the best!!!!!!!!!! God bless :)
Sir very well explained, can you please also expian fx option likr tran and traf..
Thanku very much sir..,❤️❤️❤️
Could you please provide this video in English too? Thank you in advance
Very nice thank you sir
Best among best
Sir kindly upload a video on risk return analysis
9:32 Q10
best😊
At 21.0 I think it should be 3.25-4 instead of 3.75-4
No Dear,
Please go through the concept and video once again.
Issuing loan
(I. E) he is an investor
Y he is paying interest
No Dear,
Issuing Loan, means, issuing a debt instrument like Bonds or Debentures. So obviously the entity that issues loan, will have to pay interest.
Sir u r very bad at advertising nd we as a student do regret of not taking classes from such a great faculty. Sir plz start online classes
Dear Aishwarya,
I truly apologise for this factor. Henceforth we will put more efforts towards advertising.
Yes sr if we know at right time about you surely would have taken your classes
very nice
sir no english??
Thanks sir
Thanku sir