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It is 1 October. Z Co wishes to hedge the possible receipt of A$2 million from the sale of a foreign
subsidiary that it expects to be completed in December. The current spot rate is 1.4615 A$ per £.
A$2 million of December dollar OTC put options with an exercise price of A$1.47 can be bought
for a premium of £50,000.What will the outcome of the hedge be in each of the following scenarios?
(b) The spot exchange rate on 31 December is 1.30 A$ per £.sir can you pls solve this? i know you explain the method to solve this in your lectures, but somehow i still got confused when solving this. so could you pls share your method and the final answer, as i dont have that.
many thanks!
Why are you attempting question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA approved publishers!
Since they are OTC options there are no fixed sized contracts and they can buy options on the exact amount.
On 31 December they will not exercise the option because it will be better to convert the receipt at spot. Therefore the receipt will be GBP 1,538,461. However they will still have had to pay the premium of GBP 50,000.
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