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Sir please have a look at option with exercise price 1.62, no of contract are 23.7 and as per lecture iI m taking nearest as 24.
Now please check where i m going wrong,as i m getting different answer from examiner. £payment=1500000
Premium=24×62500ו0342=$51300
51300/1.5938=£32187
Amount over hedge=
2.4m-(24×62500×1.62)=$30000
30000÷1.5962(as we will b selling dollar so i have taken spot dollar sell rate)
So my answer is 1.5m+32187-18795=
£1513392.
Please clarify and also hope the rate i have take to convert overhedge dollar into £is correct i mean it should be spot only not forward.The difference is due to the fact that he has used 23 contracts whereas you have used 24 contracts. In practice you can due either (and here, as it turns out, using 23 contracts would have worked out to be slightly cheaper in the end).
However in the exam, round the nearest (here 24) and you would still get full marks.Ok sir. But please confirm me that the rate i have taken to convert the over hedge dollar into £ amount is correct.Thanks
Sir.
In the above question we have to actually hedge the net payment of $ 2.4mln.
so while working out option outcome i also take 24 contracts but i think while convert the over hedge dollar into £ amount the buying rate should be taken as we have to buy that amount of over hedge at the spot so the correct rate is 1.5996.
Kindly clarify.
If its overhedge then we do sell rate as we have more dollar so we will be selling.If its under hedge then we use buying rate,as we will be buying. Hope that help.
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