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The exercise price quotation is in Wirtonia $ per €1, premium is % of amount hedged, translated at
today’s spot rate.HEDGE FOR THE RECEIPT OF 7500M$ . DOMESTIC CURRENCY EURO
Exercise price Call options Put options
7.75 2.8% 1.6%
7.25 1.8% 2.7%
Since price are quoted in 1(EURO) = the contract currency should be euro right since contract currency is euro it should be a contract to buy euro and hence we need to buy call option right??
DOUBT – in the answer they have shown that in this situation we need the buy put option is the answer given in the texbook wrong .QUESTION 40 BURYECS (MAR/JUN 17) BPP KIT QUESTION (C)
The answer in the BPP Revision Kit is (as always for past exam questions) just a reprint of the examiners own answer and is correct.
These are OTC options and therefore there are no fixed sized contracts (and therefore no contract currency).
They are receiving $’s and therefore need to sell $’s and buy €’s. They will therefore buy an option to sell $’s (i.e. a put option) at an exercise price of either 7.75 or 7.25 $’s to the €.