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Hi sir, I have a question. When come to calculate the premium payable under the option contracts, how to determine which spot rate should be used in order to convert into ($)?What’s the logic behind? Thanks.
The premium on options is always payable immediately and so will always be converted at the spot rate on the date the option is purchased.
I do suggest that you watch my free lectures on foreign exchange risk management, where all of this is explained.
Hi Sir. Thanks for the reply.
For this question, the premium is converted the spot rate of $1.1618 instead of $1.1585. For my understanding, I applied the bank always wins rule.
However, I found the similar question in June 2011 Q2 Casasophia. The premium is converted by $1.3585 instead of $1.3618.
These two scenarios are considered the same situation? Or is my misunderstanding? It made me confused.
Thanks.
In Lirio, the option premiums are quoted in Euros, and the spot exchange rates are quoted as $’s per Euro.
So to convert the premium payment to Euros we multiply by the higher of the two rates.In Casasophia, the option premiums are quoted in US cents. The exchange rates are quoted as $’s per Euro. So to convert the premium payment to Euros we divide by the lower of the two rates.
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