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mock exam 2 ,bpp q2 , b) part of question since company need to pay why its exercised at a strike price lower than future price , (future price 1.45 ,strike 1.435) while in part (a) of question as the company is borrowing it is exercised at price greater than future price!
arent both (a) and (b) same? shouldnt it be exercised when strike price greater than future? so we receive a gain ?
Part (a) is asking about interest rate options, and interest rate options are options to buy or sell futures. Therefore when deciding whether or not to exercise we compare the strike price with the futures price.
Part (b) is asking about foreign exchange options, which have nothing at all to do with futures. Whether we exercise or not depends on whether the strike price is more or less than the spot rate on that date.
I do suggest that you watch again my free lectures on foreign exchange risk and on interest rate risk.
Oh, thanks for bringing that to notice. I got confused when this two were asked. How can I avoid such confusions in the exam?
May I ask in MOCK exam 3, Q 2) it said in next 6 months Massie will receive 25 euro so doesn’t it mean March contracts should be purchased (6 months from September ) so it can protect any fall/increase in the interest rate during that period? or is it always the month that falls after investment month in both cases? ( interest rate option cases and Future ??)
I went through Q2 of mock exam 2, aren’t the ones given tabular format in question the strike price? ( 1.45, 1.46, 1.47)
either we can convert it at spot or exercise and claim back the difference so shouldn’t be like selling put option at strike price 1.45 and spot on 3month is 1.435 ie; (1.45-1.435) *95 contracts * 31250 / 1.4386. The answer what they have worked out is taking strike price 1.435, isn’t strike price always the selling price? :/
and yes I have seen your lectures on similar problem and you have taken strike price as selling price of put.
Although the final result in the BPP answer is correct. The wording in the answer is complete nonsense.
The possibly strike prices are 1.4500, 1.4600, and 1.4700. (The answer has labelled them ‘futures price’ which is wrong).
As to whether or not they are exercised, depends on whether the spot rate is 1.4350 or 1.4780.
If the spot rate was 1.4350 then all the options would be exercised (because they have the right to sell at 1.4500 etc, and all of them are higher than 1.4350.If, on the other hand, the spot rate is 1.4780, then none of the options would be exercised, because all of them are lower than 1.4780.
This is very poor of BPP 🙁
In Mock exam 3, it says that the 25M will be received on 30 November (and will then be invested). Since we need to protect against interest rate changes between ‘now’ and 30 November, we use the futures ending soonest after 30 November (which are December futures).
(In future, please start a new thread if you are asking about a different question).
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