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sir here we have the put options which are right to sell..when the predicted rate is 7.6 nd the exercise price is 7.75 so why are we NOT exercising the option and selling contract at a higher rate??
also sir can u briefly mention some main calculations differences which should be kept in mind when dealing with OTC derivatives like this one?
thanks
The two rates are $ per €1
There is a receipt of $7,500.
Dividing by spot of 7.6 to convert to €’s will give more than converting at the option rate and dividing by 7.75. Therefore we will not exercise the option.
(We are not selling anything – we either convert at spot, or we exercise the option and convert at the option rate.)The only difference between OTC options and traded options, is that you are not limited to fixed size contracts – you can get an option quoted for any amount. (Also they can quote the premium in any way they want to – here it is quoted as a %, but that is made clear and is not something you need to learn.)
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