IBM issued a 7 year £400 million British pound interest only loan in 2010. The l
ID: 2658585 • Letter: I
Question
IBM issued a 7 year £400 million British pound interest only loan in 2010. The loan was syndicated by the lead manager J.P Morgan at coupon interest rate of 1-year LIBROR plus 75 basis points. IBM received net proceed of 98.2 per 100 face values after underwriting spread. Currently it is April, 6, 2017 and this loan is coming due in 3 months and IBM is concerned about possible devaluation of the U.S. dollar. IBM treasurer is contemplating to hedge its exposure by creating a collar in the option market. Using the attached quote sheet answer the following questions. The call and put have 3 months to maturity.
Strike Price
Call
Put
Bid
Ask
Bid
Ask
$1.50/£
0.046
0.050
0.025
0.029
What is the payoff of a collar (long call and short put) at strike price of $1.50/£?
What is the synthetic long forward rate created by a long call and short put? Show details of your estimation using put call parity.
Strike Price
Call
Put
Bid
Ask
Bid
Ask
$1.50/£
0.046
0.050
0.025
0.029
Explanation / Answer
The payoff of a collar at strike price of $1.50/£
= premium received on put- premium paid on call ( since both options expire worthless)
=0.025- 0.050
= - $ 0.025
The synthetic long forward rate is $1.50/£ .
According to put call parity
C + PV ( strike price) = P + S
C = price of call, S= spot price and P= price of put.