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Hello John Moffat,
I would like to ask Q2 (ii) on which derivative products should use.
I understood on how we can get the income amount by using the forward rate, but get confused when it comes to 2nd option of the derivative product, either purchase Euro call or put options.I was thinking since Lignum Co will be receiving money, then why purchasing the Euro call options is preferable than purchasing the put options?I do not understand the answer stating,”Purchase call options to cover for the ZP rate depreciating.” How can buying call options can cover each currency from depreciating? Please enlighten me on this.
Second question, if let say the answer is opt to buy the put options, is the premium payable immediately still need to be borrowed initially? I mean the premium amount for put options still need to multiply with the borrowing rate?
Thank you in advance.
Lignum will be receiving ZP and will therefore need to sell ZP and buy Euros. They therefore want the option to buy Euros at a fixed rate – i.e. a call option.
(Whether we buy put or call options still means paying money now for the premium and therefore we will assume that the money is borrowed in both cases.)
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