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Hello Mr Moffat,
Sir i just got one question in BPP Mock 2, Q2 Autocrat Plc.
The company needs to make a payment of $4.3M in 3 months time.
The rates in 3 months time is $1.435-1.4386/£
Contract size is £31250 and options are 1.45, 1.46, 1.47If the strike price is 1.435, all options will be exercised. However when calculating the gain made on the option, to get the value of Pounds, they divided by 1.435, in which i thought, dividing by 1.435 is to get buy Dollars rather than selling the dollars to convert into pound. I.e they should divide by 1.4386
They did
95 (contracts) × (1.45-1.435) ×31250 = 44,531.25To get in pounds they divided by 44,531.25/1.435 = 310,032
So my question is why did they divide by 1.435 rather than 1.4386 because the gain wil be made in dollars so they need to sell dollars.
Thanks
Soud SaeedWithout having seen the actual question, it seems they have made a mistake.
On everything that you have written, they should have converted the gain at 1.4386.
I really appreciate for everything Mr Moffat, thanks alot, you are extremely amazing, you really helped me alot especially this semister. May God bless you.
Thanks
Soud Saeed.Hi John, still on this same question part (b) (ii), at the spot rate of $1·4780 – $1·4820/£, the amount over hedged was converted at $1.4780/£ and the under hedged at $1.4820/£. From my understanding, an over hedged payment would mean having more of the counter currency that required by the hedge and hence while converting it would be a receipt. In this case, the bank/currency dealer will offer a higher rate, $1·4820/£ and vise versa for the under hedge.
A look at the December 2002 examiner’s answer for this question they had used the same rate as in BPP Kit.
You support in clarifying this is highly appreciated. Thanks.
It is because it would make sense to use the $ receipt from exercising the option to reduce the amount of $’s needed on the spot market (and this is mentioned in the free lectures).
However you would not be penalised for using 1.4820 instead (even though the final answer would obviously be a little different).
The link you gave in your question has been removed. ACCA answers are copyright and the link is effectively piracy, which is not allowed on this website. You can get the original answers either from the ACCA’s own website (use Google, because although the ACCA does not index them, they still exist on the website), or alternatively you should buy a Revision Kit from on of the ACCA’s approved publishers.
The answers in the BPP kit are copied from the examiners own answers 🙂
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