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How to buy the option contract?

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › How to buy the option contract?

  • This topic has 5 replies, 2 voices, and was last updated 14 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
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  • December 1, 2010 at 3:38 pm #46469
    Anonymous
    Inactive
    • Topics: 1
    • Replies: 2
    • ☆

    Hi, I find it’s difficult to understand the option hedging. Would someone explain the following questions for me?
    1. Say it’s Dec 1, I want to borrow $100 two month later(Feb 1 next year) and pay back on May 31 (total period is 4 months). The interest rate is keeping growing, so I want to by options (the options is sold at $10 per contract on market). So what kind of options do I need (Dec or March)? and how much?
    I see some questions are solved like this: 100/10=10 contracts
    and somes like this: 100/10*(4/3)=13 contracts
    2. If I need to pay in Euro, 100Euro on Feb 1. and I want to make currency hedging with currency option. The contract size is also 10Euro. What kind of options do I need (Dec or March)? and how much?
    Thank you !

    December 1, 2010 at 3:40 pm #72247
    Anonymous
    Inactive
    • Topics: 1
    • Replies: 2
    • ☆

    one more question, If I want to use futrue contract in these two questions, and the contract size is also 10 in each currency. How much contracts do I need?

    December 3, 2010 at 11:01 am #72248
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    You need March options. The reason is that you will be wanting to close the deal on 1 February. December options are only valid until the end of December, so you want March options which are valid until the end of March.

    You will buy 13 contracts. The reason is that you need to protect yourself against 4 months worth of interest change. The options are options to deal in futures where the gains are calculated as though 3 months interest. The make the two ‘equal’ you need to have the number of contracts as 100/10×4/3

    The same answer applies to the second part of your question as well.

    December 3, 2010 at 11:02 am #72249
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    If you were using futures, then the number of contracts would be exactly the same, for the same reasons as above.

    December 3, 2010 at 12:23 pm #72250
    Anonymous
    Inactive
    • Topics: 1
    • Replies: 2
    • ☆

    So do you mean I should always buy the option or contract jast after the commencing day of the loan or currency translation?

    December 3, 2010 at 12:50 pm #72251
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    You buy the option or futures now, but you choose the one that finishes soonest after the date the loan starts. (So if the loan is starting in February you will buy March futures – you can finish the deal at any time up until the end of March)

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