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Casasophia (6/11) – Options

Forums › ACCA Forums › ACCA AFM Advanced Financial Management Forums › Casasophia (6/11) – Options

  • This topic has 0 replies, 1 voice, and was last updated 1 year ago by Tanhia.
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  • August 24, 2021 at 2:24 am #632685
    Tanhia
    Member
    • Topics: 4
    • Replies: 4
    • ☆

    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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