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Hi John,
when calculating options hedge. If we can show that one option (1.07) is superior to the other one, because the net payment is going to be lower, then do we have to show the outcome to both exercise prices or can we show the one that is superior (1.07) and ignore the other one?( The examiner has given hedge outcomes for both).Thanks
In general it depends on exactly what the question asks for, but normally just using the one exercise price and explaining why you chose that one is sufficient for the marks. (The examiner usually shows the outcomes for all of them so that the market can still give some credit whichever exercise prices the student has chosen)
But will we get full marks if we do this. because this is easy(we could show hedge outcomes for all), and there is no point losing marks over something like this- however if there will be no marks lost then there will just be time saving?
Also kindly explain this. Why is it that examiner has used the forward hedge price (23118000) for the sale of the investment rather than the higher figure that comes from futures hedge of 23121387?
Yes – as I wrote in my previous reply, you will get full marks provided it is clear that you know how options work and that you have explained why you chose the one you have chosen (provided the question didn’t specifically ask you to illustrate for all of them).
With regard to your second question, there is no investment being sold and so I am confused as to what you are asking.
(Have you watched my lectures working through the whole of this question?)
aah sorry. Creating another thread for this question. Accidentally posted query related to another qs under this thread.
Yes, i watched the lecture, especially for the swap part which you made quite easy.
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