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If the two strike price are given.. kaplan book states that select strike price that result in maximum receipt or minimum payment and solve the issue by a shortcut method… But the examiner always go through a full process of hedging and calcute cost or receipt under both strike price.. for example. For call option two strike price.
Strike price: 115+premium 1.99= 116.99
Strike price:116+premium1.39 = 117.99
They simply select the 115 strike price as this price result in low payment.. but in past paper the examiner calculate under both options.. what method need to be adopted in exam…There is no ‘best’ strike price. The reason is that although different strike prices will give ‘better’ limits, the premium will be higher and the premium will still be payable if the option is not exercised.
For this reason, ideally in the exam you should show the workings for all available exercise prices. If you are short of time, then given that most of the marks are for proving that you know how options work, then just show the calculations in full for one of the strike prices (but state that others are available). You will then not get all of the marks, but you will get most of them 🙂
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