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Dear Sir,
May I know why the payment from the options still uses the exercise price of $1.06 when the predicted futures price is more favourable at 1.0651? To my understanding, shouldn’t the option be allowed to lapse and the total payment = (5060000/1.0651) + premium ?
But if they use options then futures prices are irrelevant.
When deciding whether or not to exercise the options, the choice is between using the exercise price and using whatever the actual spot rate turns out to be.
Here, we do not know what the spot rate will be, and the total payments shown in the answer are the maximum that would have to be paid – if (as the answer does say) the CHF strengthens against the US$, as seems likely, then the options would be allowed to lapse.(You can find my lectures working through the whole of this question linked from the following page:
https://opentuition.com/acca/afm/afm-revision-lectures/ )
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