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Hi sir,
with reference to (b) part of the question, under the options hedging – I would like to know how they arrived at $1.98/GBP?the answer explains
“if the dollar weakens relative to the pound, option contracts allow the company to purchase the required dollars in five months’ time in the spot market and let the options lapse” – I understood this.but I don’t understand how they arrived at the exact figure of $1.98.
“In this situation, the dollar would have to weaken to about 1.98/£ before the currency options became more favourable than the forward contract or futures hedge.”To be perfectly honest I really do not know how the examiner arrived at a figure of about 1.98 (and I cannot ask the examiner because the examiner has changed twice since this question was asked 🙂 )
However it was not required by the question and there were no marks given for the figure 🙂
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