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When presented with more than one option contract I am unsure how to calculate which is the most beneficial financially.
Please advise of any quick methods you use to establish the best option.
My query applies to both forex and interest rate options on futures.
Many thanks.
If in Question there are only 2 options then you have to apply calculation on both option but If there are more than 2 options then you can save time by choosing top 2 options with highest premium as you if you paying higher premium then you will be opting for better excercise price.
Choose Top 2 highest premium options for your answer.For interest rate add the all options premium to to thier respective strike rate and compare the total.
Whichever total is the highest choose its strike price and premium for calculation.Hatif: Please don’t answer in this forum because it is Ask the Tutor and you are not the tutor (but please do help people in the other, general, P4 forum 🙂 )
Drummer Bhoy: There is no such thing as a ‘best’ option. The more you limit against adverse movements in the exchange rate, the higher the premium will be, and the premium will be ‘wasted’ if the exchange rate moves favourably. (Same for interest rate options).
Ideally in the exam you would show the results for all the strike prices available (in fact, when you have done one, the others get quicker because the basic workings are the same). However, if you are short of time, then you will get more than half the marks by just showing the results for one exercise price because the examiner is wanting to see that you understand the way options work – just doing one of them correctly proves that you understand.
Our free lectures on foreign exchange and interest rate risk management will help you – they work through options (and futures, etc.) in detail.
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