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Dear Sir,
I have a trouble with the question of Casasophia on Revision Kit of BPP.
In part (a), for the calculation related to the hedging strategy of options, I found the future rate is assumed as the spot rate in four months, which is 1.3698 (in the answer).
Per question, there are two options:
– Option 1: Exercise price is USD1.36/EUR (under 1.3698)
– Option 2: Exercise price is USD1.38/EUR (over 1.3698)The call options are needed for this situation to hedge against a weakening $US. Thus, I understand that: The Company will exercise option 1 and will NOT exercise option 2.
However, in the answer:
– There is not any step to consider whether or not to exercise this option. -> Is there any missing?
– The calculation is made as if both 2 options will be exercised. -> Only option 1 should be exercised, right?Kindly help me to explain this.
Many thanks for your support.
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