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November 2, 2020 at 12:01 am
great lecture! so currency swap can be arrange between the party involve or by using bank as intermediary if the transaction date is certainly known. But swaption is for when we are not sure when the exact date they want to borrow the money right?
Thank you so much in advanced! 🙂
October 28, 2020 at 12:45 pm
Dear John, I am very thankful for your lectures! I have one small question that refers to example 3, section b). A company has the option to convert pounds into dollars at fixed rate. It’s a definition of an option. Then why they should receive the difference between option and spot rate instead of dollars? Or this is a typical bank transaction and company cannot insist on the other way of exercising the option?
From my point of view it would be easier just to receive the amount in dollars from bank and pay it to supplier. Although it would little bit cheaper as we are not translate the amount from pounds to dollars twice. The difference is about 31 pound for this example.
Thank you in advance
John Moffat says
October 28, 2020 at 2:34 pm
If it is an OTC option then it works as you have written (and as in example 1).
However if it is a traded option then the bank is not involved and it works as in example 3 🙂
October 29, 2020 at 3:42 pm
Thank you very!
October 30, 2020 at 8:40 am
You are welcome 🙂
October 15, 2020 at 7:20 am
Sir in your previous video lecture you mentioned that each of these months(depicting month ends), give us an opportunity to buy options. So i was just thinking that if we have to pay $1m IN/DURING April then why will buy PUT options in the end of april? instead should not we be buying PUT options in the march end?
Thanks in advance!
October 15, 2020 at 9:00 am
Given that the transaction is going to take place in April we buy April options because that is when they can be exercised (effectively we assume in the exam that they are American style options).
August 6, 2020 at 7:51 pm
Really appreciate these lectures, Thank you.
August 6, 2020 at 9:42 pm
And thank you for your comment 🙂
July 20, 2020 at 3:31 am
Hi Professor, for example 3- when calculating the number of contracts why do you divide by the exercise price of 1.475 instead of the spot rate?
July 20, 2020 at 7:13 am
Because that is the rate that will be used if we decide to exercise the options.
September 9, 2019 at 6:39 pm
Why we are using 1.4120 instead of being using 1.4100 in part B ?
September 10, 2019 at 10:18 am
The profit on options is calculated in $’s. It needs to be converted to Pounds and given it is a profit we will sell $’s (to convert to Pounds) at 1.4120.
November 22, 2020 at 6:43 am
Hello Prof, so in this regard the premium calculated in Ex 3 as $8250 should be converted to pounds using 1.4870 as the selling $ instead of 1.4850?
Thanks in advance.
November 22, 2020 at 9:17 am
We are not selling $’s. The premium is payable and so we are buying $’s.
May 30, 2019 at 10:06 pm
I was trying to post this in Ask The Tutor section but keep on getting message that the page does not exist.
My question does not relate to the above lecture but to the question from December 2018 – Nutourne Co.
When hedging the exchange rate risk using options in the answer book the Put Option was selected. I do not understand why put option.
The company is expecting the receipt of CHF 12,300,000 so when it happens it will have to sell CHF and Buy $ – therefore call option should be selected.
Please help me understand the reasoning for selecting the put option.
Thank you for your help in advance.
May 31, 2019 at 8:13 am
They will indeed be selling CHF, and since the contract size is quoted in CHF they will buy options to sell CHF, i.e put options. I do explain this in the lectures.
(And the Ask the Tutor is working fine – I don’t know where you tried, but you should have chosen ‘forums’ at the top of this page, and then selected the ‘Ask the Tutor AFM forum’)
June 1, 2019 at 5:18 pm
So if the contract size is quoted in the currency that we are going to make the payment for it is always going to be a put option? Otherwise sell option is it correct?
June 1, 2019 at 5:35 pm
If you are paying money in (say) CHF’s and the contract size is quoted in CHF’s then because you will need to buy CHF’s in order to make the payment, you will buy a call option (which is the right to buy CHF’s at a fixed rate).
If you are receiving money in (say) CHF’s and the contract size is quoted in CHF’s, then because you will need to sell the CHF’s that you receive (to convert into your own currency) then you will buy a put option (which is the right to sell CHF’s at a fixed date).
You will not be selling options – you are always buying options!
June 1, 2019 at 8:02 pm
June 2, 2019 at 10:57 am
April 24, 2019 at 11:07 pm
You have a great teacher. I pick up lot of points from your lecture. Its a blessing.
Although, this is not the right forum, since, ask the teacher is not working. I have to bother you here.
Can you please illustrate or provide me any source from which I can see illustration of “Closing out when traded options still have time to run”
Regards Thanks in Advance
April 25, 2019 at 1:57 pm
The Ask the Tutor Forum is working fine 🙂
Traded options cannot be exercised before the due date unless they are American style options (as I explain the lecture). However although European options cannot be exercised sooner, they can be sold on the exchange which would effectively have the same effect (but you are not expected to do this in the exam).
November 13, 2018 at 3:26 pm
hi in part b when we are converting the excess receipt amount from dollar to pound why we are using 1.4120 because bop kits 1.4100 is used instead…please clear.
October 23, 2018 at 1:57 pm
Thank you for the wonderful lectures. I still have a query though. I would be very thankful if you could shed some light on this one.
“A US co. owes 600000 Euro to a Spanish co. on 15 may on 3 months credit. Strike rate is(Euro 0.7700= $1), Contract size is Euro 10000 options. If Spot rate in August is 0.7500 what is the dollar cost ?”
The above question is from BPP text book. I calculated Premium at $ 21420 and that was correct. However when I tried calculating the Net outcome, I tried solving the way you mentioned and hence *I converted the transaction at spot (600000/0.75 = $800000 ) [pay] *Gain on Option 600000 euro (0.7700- 0.7500) = 12000 eu/0 .75 = $16000 [reciept] *Premium = $21420 [Pay] **NET OUTCOME = $805420 [Pay]
However as per the text book Net outcome was $800641. It simply Calculated
*Options postion (600000/0.77) = $779221 *premium = $21420
I am very confused. Where did I go wrong ? why wasnt the gain on hedge calculated in the text book.? Could you please clarify ?
October 23, 2018 at 4:12 pm
In future please ask this kind of question in the Ask the Tutor Forum and not as a comment on a lectures.
If they are traded options, then strictly it should be done the way I do it in the lectures because that is how they work in practice. If you did it the other way you would probably still get the marks because the net effect is the same (the difference is due to roundings and that is irrelevant in the exam).
If they are over the counter (OTC) options, then if the option is exercised then the conversion takes place at the option rate as BPP have done.
October 23, 2018 at 6:49 pm
Thank you very much. I am sorry about the elaborated question. I”ll keep that in mind in future.
However, I Just wanted to know if my calculation is correct ? Can the roundings create a difference of around $5000 ?
Thank you once again.
March 13, 2020 at 8:58 am
Hi Akskidd, please how did you calculate the premium because i couldnt see any premium related information in the question.
Thanks in advance
October 13, 2018 at 7:17 pm
Great Lecture sir many thanks.
I want to ask you in part B, why we converted the amount at spot? and why we get money back from dealer?
Thank you in advance.
October 14, 2018 at 10:20 am
The effect of options is to give the right to convert at the strike rate if it is better than converting at whatever the spot rate is. However the way that traded options actually work is that the transaction is converted at spot, and if the option rate is better then the difference is ‘claimed back’ from the dealer.
August 27, 2018 at 9:54 am
Hi John, The lectures are brilliant thank you. Just one question on this one, in part a once we have the premium in $ and convert to £, why do you use 1.4850 rate which is the buy $ price rather than the 1.4870 which is the sell $? Thank you for your help Kathryn
August 27, 2018 at 7:27 pm
Because we have to pay the premium. Because it is priced in dollars, we need to buy dollars to be able to pay the premium 🙂
August 27, 2018 at 9:52 pm
Thank you! I think it had been a long day, I was converting to £ instead of buying $ to pay the premium! ?
August 28, 2018 at 9:41 am
June 24, 2018 at 8:39 am
The option is the right to convert Pounds to $’s, but the price charged for having the option can be quoted in any currency. Here they are charging 1.20 cents for every GBP that you want the option on. You will always be told in the exam what currency the premium is charged in (at the top of the table of premiums).
June 26, 2018 at 11:11 am
June 24, 2018 at 4:13 am
very helpful lecture indeed!
one bit bothers me in question 3:
22 contracts x 31250 (contract size in pounds) x 1.20 cents = $ 8250
Could you explain how can the contract amount in £31250 when multiplied with the premium in cents yield a figure in USD $?
i know this is small bit i am not able to get my get around, but i see the 1.20 as premium on exchange rate and not the “complete exchange rate” itself to convert to USD from GBP
June 26, 2018 at 2:55 pm
It is not an exchange rate and it is not used to convert.
The options are priced as 1.20 cents for every Pound on which you have bought an option on.
Just as you might pay 5 cents for every kilo of potatoes, here they are charging 1.20 cents for every Pound on which they have an option.
You are always told what currency the premiums are quoted in – at the top of the table it says “cents per Pound”
September 3, 2018 at 11:41 pm
Exactly! Currency is a type of commodity too.
September 4, 2018 at 8:11 am
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