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Hi Mr John,
may you please clarify this part.
Lirio Co will receive euro (€) 20 million, which it needs to convert to USD as its main currency is USD. as per my understanding it should purchase the right to sell the EURO and buy USD, hence the put option should be selected., the right to sell.
may you please explain, why call option is selected?
Thank you
The option contract size is quoted in $’s. They need to buy $’s and therefore they will buy $ call options.
Hi Mr John,
if
1. Received is EURO- contract size is EURO – then they need to sell EURO to buy USD- put option will be selected- option to sellif
2. Received is EURO – contract size is USD – then they need to buy USD – call option- option to buy—- but they need to sell EURO and have put option in place to convert in USD.
may you please clarify this part, confusing 🙁
thank you
1. Is correct.
For 2, if the contract size is quoted in $’s, then because they need to buy $’s they will buy a call option.
Have you watched my free lectures on foreign exchange risk management where this is explained?
In this question, I have 2 doubts:
1. Why is depreciation not added back in the appendix 1 calculation of free cash flows?
2. Why is spot bid rate used when calculating the lock in rate for currency futures, I though spot ask rate was to be considered?1. It is because the question says that an amount equal to the depreciation is spent to keep the non-current asset base at its current capacity. The current examiner almost always tends to state this as I explain in my free lectures.
2. The examiners answer has calculated the lock-in rate by time apportioning between the prices for the March futures and the June futures.
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