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When working out the money market part of the question in part a) why do we use the spot in 3 months time to convert?
Shouldn’t we also be given today’s spot rather the spot in 3 months time?
The answer is not using the spot in 3 months time – it is converting at the current spot rate (1.5938), which is correct when doing money market hedging.
The spot rates are given in the question!
Thanks for your quick response!
I got one more query.
Given that 1.5938 is today’s spot and similar to real life we won’t know what spot will be in 3 months time. Is it correct to say that we won’t know if the options are in worth executing?
Unlike example 3 from the options foreign exchange chapter.
Given we don’t know what the spot rate will be in 3 months, then you are correct – we don’t know whether or not the options will be exercised. However we do know what the worst outcome will be.
In the exam either you are expected to state the above, or alternatively (and commonly) you are asked to show what will happen if the spot rate turns out to be specific rates given in the question.
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