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Foreign Exchange Risk Management Options part 3
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Hi John,
Using your method, do we need to calculate the over/under-hedged amounts and do something with it? Can you help advise?
Thanks
Ideally, yes, but you would get most if not all of the marks by just mentioning it.
Hi John,
With regards to Example 3 part (b);
We had the option of either converting at spot (1.4100-1.4120) or exercising the option of 1.4750.
If we need to Buy $’s, why are we buying them at the higher rate?
Based on the (Buy – Sell) rule you mentioned lectures ago, shouldn’t we Buy the $’s at the spot rate of 1.4100?
Is it perhaps because we are a UK company and will therefore need to sell 拢’s so the higher rate would be more beneficial?
Regards,
First we always convert the transaction at spot whatever happens. If we exercise the option we then calculate the gain on the options separately (and then put the two together).
The transaction involves buying $’s and therefore we do convert the transaction at 1.4100, which is what I have done.
The 1.4120 was used for converting the gain on the options, because the gain is calculated in $’s, and because we are receiving the gain in $’s we need to sell those $’s to convert to pounds.
Thank you very much John!
You are welcome 馃檪
Dear John,
Question
1) if we buy the option at otc probably from bank,, is this option traded in exchange market meaning can we sell in exchange market or we can only sell option in exchange market that we bought from exchange market.
2) Does the option writer who is in the short position use delta hedging in currency option and if it uses then how does delta hedging work in currency option please explain with example for delta hedging..
3) Do we need to calulate value of curency opton using black scholes model?
1. OTC options are not tradeable.
2. Yes – option writers will use delta hedges, but in the exam it is always as per my lecture. (it works in exactly the same way as I show in the lectures, just in reverse).
3. No – valuing currency options needs an amended black scholes formula, but it is not in the syllabus.
Thank you so much John,,,,,,,,You are as helpful as ever………….
You are welcome 馃檪