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Hi John,
As per Kaplan study textbook, they have a different calculation on the final net cash flow on the foreign exchange option:
Receive/payment under options +/- under/over hedged + premium
When I tried to apply this to the your notes Ch.19 example 3, I got the follows:
Payment under options: 22 x 31250 = ?687,500
Over hedged = $1,000,000 – (?687500 x 1.475) = $14,063, translate at spot /1.412 =?9,960
Premium = ?5,556
Net payment = ?687,500 – ?9,960 + ?5,556 = ?683,096which is different to the answer (?683,128), is this correct?
Thank you.
The difference is just effectively a rounding difference and is irrelevant for the exam.
Thank you.
So when we caluculate the amount claimed back from the dealer,
If we buy a puts option, is Strike price – Spot rate
If we buy a calls option, is Spot rate – strike priceis it correct?
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