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I am following the method you mention in lectures.
On transaction date we compare the Exchange rate on that date and Strike price for option to be exercise or not.
If option is exercise then according to method in lectures
Transaction at normal rates is calculated and then benefit from the option is calculated.In the question Kenduri Co(6/13) if we use this method it create problem in the calculation of the transaction at normal rates. There are 23.7 contracts(at strike price of 3.42) but we take 23 contracts and remaining amount is hedge using Forward contract. Now problem is that how do we calculate the Amount to be paid at normal rate i.e since the options we buy is less than $2.4m so it would not be appropriate to use $2.4.
In solution the combine amount is taken is 23*62500=1500000. it includes the affects of option, unlike your method.Also it save time.
How to deal with this should i start to calculate the amount using strike rate so that it will include the benefit of option.And one more thing there are usually 2 strike prices for the option, we always have to calculate the outcome at both strike price or we 1 will be sufficient?
I think you need to watch the lectures and notes again, for two reasons:
Firstly, I show both methods, and it does not matter which method you use in the exam (even though occasionally there is a small different in the final net result, but this is irrelevant – you are not marked on the final answer but on your workings)
Secondly, in the first way that I show it, the amount of the transaction (2.4M) is converted at whatever the spot rate happens to be. The profit on the options is calculated on the amount contracted (23 contracts). There is nothing illogical in that, and it is the way it works in real life.
Options will hardly ever cover the exact amount of the transaction (because of the contract size) which is why there will likely be an over or under hedge. This can be protected against by using forward rates on it (if they are available) although in the exam it is sufficient just to mention this (without really needing to do the arithmetic on it).
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