1.
Strategy B: A straddle strategy using the options in Exhibit 1 with an exercise price of
$1,125.
Strategy C: A collar strategy using the options information in Exhibit 1.
On 16 March 2012, First Citizen Bank (FCB) approached Silva for advice on a loan commitment.
At that time, FCB had committed to lend $100 million in 30 days (on 15 April 2012), with interest
and principal due on 12 October 2012, or 180 days from the date of the loan. The interest rate
on the loan was 180-day Libor + 50 bps, and FCB was concerned about interest rates declining
between March and April. Silva advised FCB to purchase a $100 million interest rate put on 180-
day Libor with an exercise rate of 5.75% and expiring on 15 April 2012. The put premium was
$25,000. Libor rates on 16 March 2012 and 15 April 2012 were 6% and 4%, respectively. The
option was exercised on 15 April 2012, and the payoff was received on 12 October 2012. FCB
has asked for a written evaluation of the success of the strategy.
On 15 October 2013, another client, Short Hills Corporation (SHC), indicates it expects to take
out a $25 million dollar loan on 15 December 2013. The loan rate is 90-day Libor + 100 bps.
Interest and principal will be paid on 15 March 2014, 90 days after the loan is made on 15
December 2013. SHC is concerned about rising interest rates and has approached Silva for
recommendations on addressing this issue. On Silva’s advice, SHC purchases a $25 million
interest rate call on 90-day Libor with an exercise rate of 3.5%. The option premium is $45,000,
and it expires in 61 days, on 15 December 2013. If the option is exercised on 15 December 2013,
the payoff will be received on 15 March 2014. SHC has asked Silva to provide a report on
possible outcomes relative to potential interest rate scenarios.
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