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part a of this question in bpp kit:
calculating furures contract size they calculasted 117 contracts. Dividing 14624,159 by 125000. Sir where the numerator has come from ? thanksThey need 4 month futures.
The 2 month futures are 1.3633 and the 5 month futures are 1.3698
The difference between the two prices is 0.0065 and there is 3 months between them, which gives 0.0065/3 = 0.00217 per month.So a 4 month future will have a price equal to the 2 month future price plus 2 extra months, which is 1.3633 + (2 x 0.00217) = 1.3676.
If you convert the $20M at this rate (to decide how many €futures they need) you get 20M/1.3676 = € 14624159
Hope that helps 🙂
Hi John,
01. This is regarding part d of the above question.
They have given 1 year inflation rates. To get 6months inflation can I just divided 1year inflation rate by 2 and use in PPT formula?
Example in part,Mazabia’s – 9.7%/2 = 4.85%
Casasophia – 1.2%/2 = 0.6%Then use ppt as follows,
1.0485/1.006 * 116 = 6months spot rate.
Examiner has taken 12months inflation rate and done something. I have tried but I couldn’t understand how he has been calculated. Kindly explain this.
02. If a call option = lowest net cost
If a put option = highest net receiptGive the best hedging exercise price. Therefore in part c 1.36 exercise price gives the best hedging. In exam if we get a this type question, is it okay just to calculate hedging calculation for 1.36 rather than calculating hedging calculation for all exercise prices?
Thanks in Advance!
01. The examiner has taken the average of the rate now and the rate in 1 years time.
(116 + 125.7) / 2 = 120.9(I don’t know why he has written it in such a confusing way 🙂 )
What you have done give the same result and is fine.
02. You cannot say that 1.36 is definitely the best. It is the best if we end up exercising the option, but we might not exercise (because the future exchange is uncertain) and if we don’t exercise that choosing 1.6 will mean we will have paid a higher premium (the premium is still paid whether or not the options are exercised).
In the exam you can never say one option is definitely better. You should show the outcomes for both exercise prices and then discuss 🙂
Hello John. Hope u re doing well. I have one question regarding to options hedging in Casasophia. May i know why do we divide the amount with spot rate of $1.3585 rather than spot rate of $1.3618 upon calculating the premium for the options. As what i learn so far, i believe we should divided by $1.3618. A bit confused here.
hope u can enlighten me. thankyou and stay safe ?
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