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Hello Mr Moffat
I was going through one question (Q.2 June 2011 Casasophia Co) and got confused over one part, to summarize the scenario,
The company is based in Europe and were expecting to receive $20M from USA in 4 months time, exchange rate at the Exercised date is $/£1.3588- $/£1.3623. The company took an option and hedged against exchange rate of 1.38. In the module answer they calculated they exercised the option, but i thought this will be not in the favor of the company since they will receive less, i.e they should not exercise the option.
The question link
https://www.accaglobal.com/content/dam/acca/global/pdf/p4_june_2011_qu.pdfThe answer link is
https://www.accaglobal.com/content/dam/acca/global/pdf/p4_2011_jun_a.pdfWords cannot be able to fully express my appreciation. Thank you very much.
But we do not know what the exchange rate will be in 4 months time (just because the forward rate is 1.3588 – 1.3623 does not mean that will be the actual exchange rate in 4 months).
The calculations on the options are showing what the ‘worst’ outcome can be if the $ depreciates.But i thought they made an assumption that the forward rates will be the rate in 4 months time, and what if Mr Moffat during the exam i did not exercise the option but i clearly stated my assumptions, is it ok?
The main thing for the marks is that you prove that you know how options work.
So provided you did this properly and stated your assumptions, then certainly you would get most of the marks.
Thank you very much Mr Moffat, you are just one in a million!, devoting all your time, effort helping students, just simply unique
Hi
When calculating the premium (cents per €), where does the 0.028 and 0.023 figures come from?
Exercise Price: $1·36/€1
Premium payable = 117 x 0·0280 x 125,000 = US$409,500Exercise Price: $1·38/€1
Premium payable = 115 x 0·0223 x 125,000 = US$320,563Thanks
They are given in the question!!!
They are the premiums, and as the table says the premiums are (as always) quoted in cents. 2.80 cents = $0.0280
I do suggest that you watch my free lectures on foreign exchange risk management where I explain all of this at length, with examples.
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