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 CFAI Book5, Chapter 28, BB15 - Error? 
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Joined: 01 Mar 2013
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I got confused about the very last result of the calculation of the effective interest of the blue box question no 15 in this chapter. Its a floating rate borrower, who is buying a collar (long cap, short floor).
It correctly subtracts the caplet payoff from the interest due, but since it is SHORT floor it should also subtract the floorlet payoff from the interest due. Its correctly stated (with a minus sign) but in fact, the short floorlet is ADDED UP to the interest due. This implies a wrong effective interest, in my opinion.
Am I missing something or is that an error? Haven’t found anything in the errata.


08 Jul 2015
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Joined: 01 Mar 2013
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push it reeaal goood…


08 Jul 2015
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Joined: 01 Mar 2013
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if you’re short the floor and the borrowing rate went below the floor, don’t you owe money?


08 Jul 2015
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Joined: 01 Mar 2013
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Thx Galli, you are completely right.
What got me so confused was the fact, that CFAI was switching perspectives in those blue boxes 13, 14, 15 from borrower to lender to borrower… and that their calculations seem not be consistent. But they are. Watch out for the details :)


08 Jul 2015
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Joined: 01 Mar 2013
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Yeah it took me a couple of passes to realize the 10k they quote in the paragraph is the payoff to the buyer of the floor… Annoying


08 Jul 2015
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