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Hi,
I am confused with question c) regarding the currency options. Why is that in the BPP answer they exercise $7.25 but not $7.75?
The predicted spot rate is $/€ 7.6046.
Given that they are receiving $’s, if the option exercise rate is $7.75 then they will not exercise because converting at spot will give them more. If the option exercise rate is $7.25 then will exercise because converting at 7.25 will give them more $’s.
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