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In your last lecture on foreign exchange 2, part 2, we were given the actual spot rate on the T-day to make the payment and we were able to compare with our option to determine if we use or throw out our option.
What do we do in a question where we are not given the actual spot rate on the date of the transaction? Do we predict using purchasing power parity? or the spot mid-rates?
Thanks
If you do not know the actual spot rate, then don’t try and predict it.
Instead make it clear that you know how options work by showing what the worst outcome is.
Respected sir, i am very confused about divide or multiply, e. g for conversion from dollars to pounds when we divide the total transaction cost with exchange rate and when we multiply?? kindly reply thanks alot.
It depends on which way round the exchange rate is quoted.
If you watch the first of my free lectures on foreign exchange risk management, I work through several examples explaining how and why to convert, depending on the way the exchange rate is quoted and on whether we are receiving or paying the other currency.
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