- This topic has 4 replies, 2 voices, and was last updated 8 years ago by
.
- Posts
Pongo plc is a Uk based import-export company. It has an invoice, which it is due to pay on 30 june, in respect of $350k.
The company wishes to hedge its exposure to risk using traded options.
The current $/pounds spot rate is 1.5190-1.5230
.
Contract size is pounds 25k.
Put options
1.45——-10.20c
1.50——–12.40c
Now its 31 marcCalculate the cash flows on 3o june if the spot rates is $1.4810-1.4850 to pounds?
So after watching your lectures, this is how I did and I think im wrong with kaplan answer?
First step pay $ so buy $ and sell pounds, so put option.
Strike Price 1.5 chose this after deducting the premium oki?
350k/1.5/25000 = 9 contractsso 9 *25k*0.1240= 27900/1.5190= 18,367 pounds total premium payable, I choose 1.5190 coz we have to pay premium in $ so buy rate is that oki?
Then on the transaction date we exercise the option ,coz we sell at 1.50 buy at the spot rate of
1.4810 we make a profit is that understanding oki?so 350k/1.4810= 236,326
then profits on option
9*25k*(1.5-1.4810)=$4275/ ????
moreover when should we add and minus premium here we add premium how?On its own the profit on the options would be converted at 1.4850 because you would be selling $’s
BUT…….it would be better to use the profit (in $’s) to make part of the payment of 350K and then simply convert the balance of the payment at 1.4810.
(This would be the same as converting the profit at 1.4810)The premium is always a payment. So if the transaction itself involved a payment then the premium increases the total cost.
If the transaction itself were a receipt, then the premium would reduce the net receipt.When I deduct the profit in $ to 350k then the answer is correct, but my way its showing a difference of 8, will I loose marks?
- You must be logged in to reply to this topic.