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Sorry John,
I clicked wrong button. Can you please kindly explain this to me?
I don’t understand the benefit Buryecs receive from swap:
5000x(.1430-.1315)x0.675=39m. Where is 0.675 from?
Thanks a lot.
Hi John,
I have problem with the same question part c), the put option has right to sell at exercise price. exercise price is 7.75 while actual exchange rate is 7.6046, so the company can sell option at 7.75 and buy back at 7.6046, so the option should be exercised. When the option price is 7.25, the company should not exercise coz it can sell at actual price of 7.6046. I list the detailed calculation below:
exercise price 7.75. actual transaction: 7500/7.6046=€986
gain on options: 7500x(7.75-7.60)=$1125/7.6046=€148
premium paid: 1.6% x7500x.1430=(€17). Total of €1117Can you please point out my mistakes? Many thanks.
First question:
The benefit is on the $5,000 at time 3 (converting a current spot as opposed to the time 3 spot). The 0.675 is the discount factor for 3 years at 14%
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