Why they have not used june future price as closing future price if it was given in question instead they have calculated it using basis method ?
Also why they have done workings for both strike prices of options if one can see which one could be more beneficial , are we suppose to do workings for both strike prices in exam?
Ask the Tutor ACCA AFM
AWAN CO DEC 13
4y ago#1We do not know what the June futures price will be on the date of the transaction (we only know what the current price is), therefore we have to use the lock-in rate as I explain in my lectures.
As far as the options are concerned, we can never know in advance which will be more beneficial. It depends on what happens to the interest rate and whether or not the options are exercised. The exercise price sets the worst outcome, but if the option is not exercised then the premium is still payable.
In the exam you should always attempt to show the outcomes for all exercise prices (and these days there only ever tend to me two). If you are running out of time, then just showing the workings for one of them (and stating that there is another available) will get you more than the half marks needed because you will have proved that you know how options 'work'.
Thank you so much sir
4y ago#3You are welcome.
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