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Dear John,
If we hedge using currency options and we have several stirke prices, do we need to make calcualtions for all strike prices without considering whether the option will be exercised or not.
I’m trying Question Lammer PLC June 06. There are three strike prices. I made comparisons with the five month forward rate (assuming that it is spot rate at that time) to decide if the company will exercise the option. But in the answer calculations are made for all strike prices without considering whether they will be exercised or not.
But in case of interest rate options always comparisons are made for deciding whether exercise or not.
I’m confused.
Please help.There are several ways of illustrating how options are used, and the marks are almost entirely for proving you know how they work.
In this question, because we do not know what the spot rate will be in 5 months time, the answer has demonstrated the effect of using options by calculating the worst that can happen (which is if the options are exercised). Within the report is explained that this is the worst outcome, but that we could do better depending on what happens to the exchange rate.
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