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Hi
Please explain why it was a call option and not a put option (I used put option figures). We usually ask what contract currency we need and then divide to determine how many we going to buy or sell. This was not the case in this question. Please explain the assumption used where it states the cost need to be borrowed. Why?
The question says that they are Euro options.
We will be receiving ZP’s so we will be selling ZP’s and buying Euros. So we need an option to buy Euros at a fixed rate, i.e. call options.
There is no contract size here because the are OTC. It is only with traded options where there are fixed size contracts.
The question does not say that the money will be borrowed, so as the answer says it is an assumption. You could have assumed that they already has the cash, in which case the interest rate would be different (the interest lost on the cash being used). Many times in P4 you have to make assumptions and provided you state your assumption and it is sensible then you still get full marks.
sir, why we need to calculate the opportunity cost of premium in this question? normally we just calculate the premium payable and added to the cost or deducted from the receipt right?
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