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Claim on option calculation

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Claim on option calculation

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by John Moffat.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • February 19, 2017 at 11:49 am #373132
    Abdul Rafay
    Member
    • Topics: 29
    • Replies: 44
    • ☆☆

    Sir, if we exercise an foreign exchange option, there are two ways to calculate the net outcome:

    1. Convert at spot, add claim on option and subtract premium (As you do it in your videos)

    2. Convert at option rate, add/subtract any difference in hedge at closing rate due to contract size being different than business transaction and subtract premium.

    Am I right?

    The questions done in the BPP study text were done with 2 and I obtained the same result when I did them with 1 I find it easier, except for the following question:

    Date: 15 May
    Payment: 600,000 Euros
    Option rate: 0.7700 Euro : 1$
    Options contract size: 10,000 Euro
    Option premium: 3.57
    Spot on payment date: 0.7500 Euro : 1$

    We need 60 contracts.
    Premium is $21,420 (0.0357 x 10,000 x 60)
    We exercise option because 0.77 is better than 0.75

    On transaction date:
    Payment on spot: 800,000 (600,000 / 0.75)
    Claim on option: ????? (I am not able to calculate this)
    Premium: 21,420
    Total (from the book’s answer): 800,641

    How can we calculate the claim on this question?

    February 19, 2017 at 4:34 pm #373175
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    It is because the exchange rates are quoted the other way round.

    The spot on the date of the transaction is €/$ 0.75, which is the same as $/€ 1.3333 (1/0.75)
    Similarly the option rate is $/€ 1.2987 (1/0.77)

    So the gain on the options is 60 x 10,000 x (1.3333 – 1.2987) = $20,760

    So the net results is 800,000 – 20,760 + 21,240 = 800,480
    (the difference is simply due to the rounding of the converted exchange rates).

    The examiner sometimes uses one method and sometimes uses the other method – you get the marks either way (and most of the marks are for proving you understand options, rather than for the precise calculations 🙂 )

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  • The topic ‘Claim on option calculation’ is closed to new replies.

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