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In Kenduri Co question available on the exam kit, please advise why are we calculating the net payment under both the exercise price of 1.62 and 1.60. Can we not use the best exercise price (That is 1.60) and state the options contract hedge.
Also the suggested answer in the exam kit states that number contracts as 23.7, however this is rounded down to 23, which is confusing. And the full answer uses the 23 contracts to get the final net payment.
Please clarify on the above two points.
There is never such a thing as a ‘best’ exercise price. Different exercise prices set higher or lower limit, but the cost (premium) is different and is ‘wasted’ if we end up not exercising the options.
As far as whether to round to 23 or to 24 contracts, this is irrelevant in the exam and you would get full marks for using either.
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