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Please sir, when we have call options and are trying to calculate premium, should we not divide premium by the highest spot rate?
2) Currency Future : why did they calculate a new rate (1.5337) and used it to divide amount to be hedge on forward market
Why are we calculating amount to be hedge on forward maket in future currency?
HelpThere would be no logic in dividing the premium by the highest spot rate!
The premium is payable whatever the spot rate is now or in the future.I assume in your second question that you are referring to the calculation of the number of contracts needed. It is actually arguable as to whether it is better to use the current futures price or the lock-in rate for the calculation (and the examiners have not been consistent in this). You would get the marks whichever you used (and the difference in the number of contracts will anyway we minimal if in fact there is any difference at all).
I do suggest that you watch our free lectures on foreign exchange risk management where all of this is explained in detail.
Hmm I need help really lost. I have watched the currency futures and I think I understand it.
However while solving Polytot I still don’t get why they calculated amount to be hedge on forward market (43contract x 62500sizex1.5374)- 4124236=1883
Then they found a new rate and got 1.5337, which was used to divide 1883.Do we do this in every currency future or did they say something in the passage.. help
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