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Hi there,
I have another question on the currency options. When I’m calculating the premium, why am I using a different spot rate to what was used in the currency futures part?
So in the currency futures I used 0.8632 (1/1.585) but in the currency options they’ve used 1.1618, shouldn’t we be using the same spot rate?
Thanks,
PiyaaThere is no premium payable on futures! For futures you need to calculate the lock-in rate (since we do not know what the spot rate will be on the date of the transaction).
The premium on the options is payable immediately so we use the current spot rate, and because the premia are quoted in Euros, it is converted at the higher rate to convert it to a payment in $’s.
Have you watched my free lectures on the management of foreign exchange risk?
Thank you, yep I am aware that we don’t calculate a premium on currency futures. I was just a little confused on why the spot rate used in the futures for the basis was different to what was used in the currency options premium spot rate at conversion?
I’ve seen this in two questions, Lirio and CMC
Thanks,
PiyaaI am confused as to exactly what you are asking.
For the options, we are paying a premium immediately and therefore use the relevant current spot rate for paying.
For the futures, only one rate is quoted for futures and the examiners answer has apportioned between the March and June futures prices.
With regard to CMC, you can find my lecture working through the whole of this question (and obviously explaining it all) linked from the main P4 page (under the heading ‘Revision Kit Live’.
Again, have you watched my free lectures on the management of foreign exchange risk?
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