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Hi sir.
Please I need your help
June 2011 question 2a “casasophia co ”
For the option part, the number of contract calculated is 117.6, I have used the method you have teach us in the option part lecture, that is to use whole number contract(I have used 118 contracts)to calculate premium and gain on option.But the examiner’s answer is different.He used 117 contracts and used forward contract for the unhedged amount.My question is, is it an obligation to use forward contract for the unhedged amount and if I will score full marks if I choose your method and do not use forward contract for the unhedged amount.Firstly it does not matter in the exam whether you use 117 or 118 – you would still get full marks. (Obviously the final answer will be a little different, but the marks are for the workings, not for the final answer. There is rarely one ‘correct’ answer to AFM questions.
Secondly, whether you use 117 or 118 contracts there will be either an under or over hedged amount. You should always at least mention that they could use forward rates on the over or under hedge (as I do in my lectures). Ideally (if forward rates are given in the question) show the calculation – it does not take long. However if you are short of time it is only ever worth 1 or 2 marks at most 🙂
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