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hi John,
in this question cross rate is used where one currency is pegged to other one. It is quite an old question and I am wondering if we still need to learn how to calculate cross rate? Can’t I just hedge that $HK seperate instead of converting and adding to $US?
And in the same question.
How the tick size was calculated?
Do we have to calculate all currency options with all exercise prices?
Yes – you can be asked to use cross-rates.
It is necessary here because it is not possible to hedge HK$’s directly (there are no forward rates given for $HK against the £, nor is there a borrowing rate for $HK, nor options available).A tick is the smallest movement i.e. 0.0001. The value of a tick is the profit/loss that would result from a 1 tick movement on 1 contract. (I explain this in the free lecture). However you have never had to use ticks – I never bother!
Ideally you would show the result for all exercise prices. However if you are short of time you will get most of the marks by proving you know how they work using just one exercise price.
I did not bother too (calculating premium on currency options same as you showed in lecture – # contracts x contract size x premium), but for some reason I do not get same answer as in this question.
I did:
6 contracts x GBP 31,250 x 0.0179= 3356.25
converted at spot @ 1.4358 = GBP 2,3375.55I assume that you are using an exercise price of 1.43.
You have taken the premium for a September call option – it should be a put option and so the premium is 0.0312.
Then you will get the same as the examiners answer (although he has also added on interest to account for the fact that the premium is payable immediately – strictly that should be done, but that is a fairly minor point.)
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