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Lignum Co —
I want to know (1)why it has not used money market hedge ? and (2) how to know which put or buy option to use when there is no contract of currency of contract?It is from December 2012, in the question is has gave in at last paragraph of Case 1 Lignum co can borrow at base rate plus 150 basis points and invest money at base rate minus 100 basis point in france, base rate in Zuhait is 8.5% and in france is 2.2% .
In the answer provided by ACCA used only forward and option ,I believe money market hedge also could be constructed ,since rate is given of two country, is it possible or not to use money market hedge from tis type of scenario ? if yes then why has not ACCA used money market hedge?My 2nd Question is whenever we use option we usually buy put or call option on the basis of contract size in which currency it is quoted but in this case there is no contract size or contract of currency given then how can we be sure which put or call option is to use? ,the ACCA answer had used is call option by saying purchase call option to cover for ZP rate depreciating.
So please tell me which put or call option to use when there is no contract currency is provided?
They are over the counter (OTC) options – not traded options. So there is no contract size – you get the option on the amount you require.
Since it says that there are Euro call and put options, then the call option is an option to buy euros and a put option is an option to sell euros.
The question actually says ‘which of the two derivative products’ – the only two mentioned are options and forwards.
(Money markets are not derivatives, and anyway the question does make it clear that they want options and forwards).
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