Question is asking which combination will have lower cost collar, ans is call 5.5, and put 4%. I und the part lower put X will pay less for a long put. But why a lower 5.5% for call will make it lower cost?
Originial call X : 6%
Original put X : 4.5%
A is correct because both the put and the call have lower exercise prices than the one being proposed. Hence, for the same underlying, the cost of the put with an exercise of 4 percent (instead of 4.5) less the premium received from writing the call at 5.5 percent (instead of 6) exercise should be lower than the one being proposed. Mink pays less for the 4 percent put and receives more for writing the 5.5 percent call.
anyone? Thanks a lot
Originial call X : 6%
Original put X : 4.5%
A is correct because both the put and the call have lower exercise prices than the one being proposed. Hence, for the same underlying, the cost of the put with an exercise of 4 percent (instead of 4.5) less the premium received from writing the call at 5.5 percent (instead of 6) exercise should be lower than the one being proposed. Mink pays less for the 4 percent put and receives more for writing the 5.5 percent call.
anyone? Thanks a lot