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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Nutourne Co – Dec 2018
Hi Sir,
In the below question can you please explain to me how the hedging using the Options is done?
And why haven’t they considered the gain in options if the Option is exercised
Q – (a) Evaluate which of the exchange-traded derivatives would give Nutourne Co the higher receipt, considering scenarios when the options are and are not exercised.
If the Options are exercised.
Premium Paid = -105.350
Options Receipts = 12,709.375
Gain On Options = 20.825 ( 1.0375 – 1.0358 = 0.0017)
Underhedged = 51.790
Total Receipt = 12,676.640
Are Not Exercised
Premium Paid =-105.35
Options Receipts = 12,688.55 (1.0358*98*125)
Underhedged = 51.79
Total Receipt = 12,634.99
Could you please explain why my answer is wrong?
There is no gain calculated on options.
Options give the right to either convert at the exercise price or alternatively to convert at whatever the spot rate happens to be, in which case the option is not exercised.
Have you watched my free lectures on options?