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John Moffat.
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shaunak22
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Sir in many forex and interest rate sum there are in interest ratee or forex option there are many exercise price so in kaplan text choose the exercise price which result in the most beneficial position{for eg your domestic currency is pound and you need to make payment in $ available exercise price are as follows-
1 pound = 1.50$ at a premium of 5 cent which gives us 1.45 $ per pound
1 pound = 1.60$ at a premium of 20 cent which gives us 1.40 $ per pound
In this case clearly the 1.50$ exercise price is better since it gives us more dollar per pound but in the BPP kit when they are solving the question they are solving for both the exercise price why is that ?
DOUBT – should i caclulate total payment in pound for both the exercise price or should i calculate for only 1 exercise price i.e 1.50 in our case & would marks be deducted if i only calculated for 1?
John Moffat
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You can never really say which is the best choice because the better the ‘limit’ given by the strike price, the more will be the premium cost (which will be still have been paid even if the option is not exercised). In your example, an exercise price of 1.60 would mean a lower payment in pounds, but the premium is more.
In the exam you should show the calculations for each of the exercise prices (usually there are only two). If you are short of time then showing the calculations just for one of them will get more than half the marks (because the important things is to prove that you understand how futures work) and your objective always is to get more than half the marks on every part of every question.
shaunak22
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