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Hello John
Dont know if you are able to, but could you advise how many marks this answer that i prepared would get roughly please? And maybe point out if something is wrong:
Q Discuss the advantages and disadvantages for Gogarth Co in using exchange-traded currency options compared with using over-the-counter currency options. (5 marks)
advantages in using exchange-traded currency options compared with using over-the-counter currency options
If the exchange traded currency option is not needed, as the currency rate has moved in a favourable positon, they can be sold on. This is option is not available with an OTC agreement.
There is a lower counterparty defualt risk. The exchange is a regulated market. If the other side defaults on their side of the deal, the exchange will cover gogarth.
Disdvantages in using exchange-traded currency options compared with using over-the-counter currency options
OTC currency options other a wider variety of currency agreements. This will be of particualr use to Gogarth, as they look to expand their operations abroad.
Exchange traded options are sold in standard contract sizes. This leads to potential situations where there is an under/over hedge of currency exposed to transaction risk. This is not an issue with OTC options as they are tailored to the exact requirements.
Exchange traded options require an intial deposit to be paid into a margin account. This is not needed for OTC currency options. This will be of particular importance if Gogarth if struggling with cash flow (even though they still own the deposited monies).
We are not able to provide a marking service, but I think you would have got 3 or 4 marks for this.
It is all fine apart from your mention of a deposit being payable for traded options. That is not the case (the margin/deposit is only relevant in the case of futures). For both traded and OTC options, a premium is payable when the option is first bought (whether or not the option is exercised). An advantage of traded options is that the premium is determined by market forces and is therefore a ‘fair’ price, whereas with OTC options the bank can charge any price they want (and so it would make sense to ‘shop around’ to see if someone else will provide it cheaper).
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