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Dear John,
When hedging by currency options we can have several strike prices for the same option.
So, both in your lectures and in the Kaplan exam kit it is mentioned that calculations should be done for each price and on the basis of the results to choose the suitable strike price.However, in the kaplan study text, it is said that in order to choose the strike price we can calculate net receipt from the put option (as the difference between strike price and premium) and choose the one with the highest receipt. Or in the same logic to calculate the total cost of a call option (as the sum of strike price and premium) and choose the one with the lowest cost.
Another way, it says, choosing the strike price price which is the closest to the current spot rate?
So there are 3 different ways?
Which one to use in the exam?
Which will give a correct answer and save time, of course?)))Looking forward to your answer!
I don’t agree with Kaplan, because we do not know in advance what will happen to the exchange rate.
If it moves against us a lot, then the option offering the best strike price would have been the one to go for, but that will be also the one with the highest premium (which would be ‘wasted’ if the exchange rate goes in our favour).
Ideally in the exam you would consider all of the strike prices (and in fact once you have done the workings for one of them, then it gets much quicker doing the other two.
However, if you are short of time then just doing the calculations for one of them will get more than the half marks needed – what matters for the marks really is proving that you understand how options work.
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