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Hi John,
I notice the examiner uses expected future price for interest rates option but not for currency option.
Examples are Q4 June 2015 Daikon which asked interest rates options and the examiner uses expected future prices to decide whether to exercise the interest rates options.
However, in Q1 June 2014 CMC, the examiner didn’t use expected future price for currency options hedge.
Why the examiner didn’t use expected future price for currency option but presumed exercise all currency options?
Should we calculate what examiner do in the past, i.e. use expected future prices for interest rates options to decide whether to exercise option but exercise all options for currency options but not using expected future prices?
Many thanks in advance.
Interest rate options and currency options work completely differently.
Currency options give the right to convert money at a fixed rate on a future date.
Interest rate options give the right to buy or sell futures at a fixed price on a future date.
So with interest rate options, futures are important; for currency options, futures are irrelevant.
You really need to watch our free lectures on foreign exchange risk management, and on interest rate risk management – it is not something that is possible to explain in a few lines here.
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