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Dear Sir,
In currency options when deciding the strike price the following is normally done. I want to know why it is done?
1. For put options deduct the premium
2.For calls we add the premiumWhat you have written is not in fact a rule for choosing a strike price. There is no such thing as a ‘best’ strike price because different strike prices fix different ‘worst’ outcomes, but the better the ‘worst’ outcome the more the premium will be and the premium will be still payable even if the option is not exercised.
In the exam, ideally you will look at all of the exercise prices and then discuss (although if you are short of time, then just looking at one exercise price and discussing will get most of the marks, because the examiner is wanting to check that you know how options work.)
(Even though it is not a rule, as I have already written, are you sure you are not referring to interest rate options? With foreign exchange options, what are they adding or deducting the premium from? 🙂 )
Thanks alot.
Yes I was referring to currency future. But now I understand. For interest options the strike rate needs to be selected by looking at both premium and interest rates.
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