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Hi sir!
The methodology that you’ve used to the calculate the net financial effect for currency option is quite different the one mentioned in Kaplan and BPP.
In your method, we translate the transaction at the spot rate and then we claim the difference (if we choose to exercise).
But in the books of Kaplan and BPP, they are not claiming the difference and they have computed this in a different way which is really confusing me. However, I am really comfortable with your method.
Could please tell me, if I will score full marks if I choose your method?
In addition to that, how does this currency option works in real life scenarios, do companies claim the difference from the dealer if they choose to exercise their currency option?Thank you in advance for your explanation!
Yes. The way that I show in my lectures is the way traded options work in real life and will get full marks in the exam.
The one time it is different in real life (and in the exam) is when they are OTC (over the counter options). In that case, if the option is exercised then conversion takes place directly at the agreed option rate (and I do explain this in my lectures).
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