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Hi Sir
Apologies, if you see my request twice as i was having trouble posting my question.
I am slightly confused about the exchange rate we have used to calculate premium amount.
Please let me know where i have gone wrong.
Since we are converting dollar receipt into Euro, the contract is in Euros and the exchange rate given is USD /EURO. i don’t understand why kaplan has used higher rate to convert premium into Euro.
Contract size €125,000
Receipt expected in 4 months – USD 20m
We need to buy call options since we are hedging receipts.
Spot exchange rate USD/€ = 1.3585-1.3618
Currency futures 5 months = 1.3698No of contracts = 20m ÷ 125000 ÷ 1.3698 = 116 contracts.
I was calculating premium as 116 * 125000 * .028 ( premium amount) and then divide by 1.3618 to convert to euro since we will be selling usd.
Thank you
DThe premiums in the table provided in the question are quoted in US cents.
The premium has to be paid and therefore they need to buy $’s (not sell $’s) in order to pay it 🙂
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