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b – part that is using option to hedge
i did not understand y will they not excercise option with ex price 7.75 and they excercise option with ex price 7.25. they havent answeredit in detail ,so am having dificulty understand it.
and also in 7.75 ex proce they have taken 986m in net reciept and in 7.25, they have taken 1034. why?
The forecast exchange rate is $7.6046 to €1 (as explained in the workings in the answer).
If they did not exercise the option they would therefore receive $7,500 / 7.6046 = € 986
Exercising the option at $7.75 would mean a receipt of $7,500 / 7.75 = € 968, which is less – so they would not exercise the option.
Exercising the option at $7.25 would mean a receipt of $7,500 / 7.25 = € 1,034, which is more – so they would exercise the option.
Have you watched my free lectures on the management of foreign exchange risk?
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