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Casasophia Co (6/11)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Casasophia Co (6/11)

  • This topic has 5 replies, 2 voices, and was last updated 8 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • November 28, 2016 at 11:35 am #352134
    nadd
    Member
    • Topics: 1
    • Replies: 12
    • ☆

    Sir, i have query regarding the currency option.

    For the currency option exercise price at $1.38 should we not exercise it?

    Because if we assumed the spot rate in 4 months time is $1.3623 which is lower than the exercise price then we should not exercise it

    We should convert all the amount receipt of $20m at $1.3623 minus the premium

    But why examiner answer exercise the 1.38 option?

    November 28, 2016 at 2:26 pm #352174
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54655
    • ☆☆☆☆☆

    But you can’t assume that the spot rate will be 1.3623 in 4 months time. The questions mentions considerable uncertainty.

    If it did turn out to be 1.3623 then certainly we would not exercise the 1.38 option. But since we are uncertain, the receipt calculated assuming the option is exercised is the worst that can happen – the actual receipt might end up being higher but cannot be lower.

    November 29, 2016 at 1:29 am #352268
    nadd
    Member
    • Topics: 1
    • Replies: 12
    • ☆

    But if in real exam if i wrote i assumed the spot rate is 1.3624 in 4 months time and do calculation for not exercise the 1.38 option is it incorrect and examiner will not give me marks?

    November 29, 2016 at 6:17 am #352300
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54655
    • ☆☆☆☆☆

    You will still get the marks provided that you state your assumption and that you have shown enough to prove that you know how options work (i.e. that they limit the worst outcome).

    November 29, 2016 at 10:32 am #352335
    nadd
    Member
    • Topics: 1
    • Replies: 12
    • ☆

    Thank you sir! 🙂

    November 29, 2016 at 5:10 pm #352413
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54655
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
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