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Hi John
A UK company wants to hedge against a $payment.
Wishes to use OTC exchange options.
My question is which option? Put or call? How do we decide in OTC since no contract size or contract currency is given.
The premium was directly given in $. We didnt have to calculate the premium.
This was q 2 of the dec exam – they didnt publish this question so you wont be able to see it 🙁
They would want to buy a $ call option.
There is no contract size with OTC options.
John I choose put optiIn but i have converted $payment And premium correctly .although i have used put option premium.hope you have understood.do you reckon i would be awarded any marks for this.your feedback on this qould be much appreciated.really feling bad as i have practised hedging a lot and here i am with this mistake.
I really cannot say without having seen the question.
I doubt that you would have lost many marks.
Thanks for your reply.
I thought as the company is based in uk the base currency £ so we have to sell £ to buy $.so i choose put option.strike prices were given in £/$.so i multiplied dollar payment requirement with strike prices to find out the expected payment.premium were given in $ so i converted them to £ using spot rate as there were no forward rates were given.but i used put option premium.hope the picture is more clearer to you now.do you reckon i will get some marks awarded out of 8.Thank youIt is still impossible for me to be sure without seeing the whole actual question.
However even if you did it wrong you would certainly not lose all of the marks.
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