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i watched your lectures and did example 3 in chapter 19…after this i attempted to do a question from my revision kit but the question does not tell which strike price to use….
there are usually three strike prices how do I know which one to use…?If you have time then you should calculate for all of the strike prices available.
However, most of the marks are for proving that you know how options work, so if you are short of time just do it for any one of the strike prices and you will get the majority of the marks.
Please solve it.
XYZ UK based company have to pay $2m in july.
Spot rate now is $/£ 1.5350–1.5370.
Strike price is 1.525.
Contract $/£ £31250
July spot rate is $/£ 1.460–1.4620
Solution
No of contracts 42
Premium is £10688
We should exercise the option in order to get small amount of payment.
-Transaction at spot rate give £1369863 (PAY)
-Claim amount Receipt is 42x31250x(1.525 – 1.46) =$85312.5/1.4620
which is £58353(REC)
But this do not match with the book answer, Instead of using the higher rate (1.4620) if i use the the lower rate(1.460) then answer match. WHY?. I mean we are receiving the amount so should use higher rate.The reason is that instead of converted the $ receipt they are using the $’s to make part of the payment, and then only converting the rest of the $’s needed. Doing that effectively converts it at 1.4620.
It is a neat point (and I mention it in the free lectures) but you would not lose marks by converting at 1.460.Sir, why is the net payment calculation for currency option in example 3 chapter 19 and june ‘14 Q1(a) so different?
What kind of question should i apply the 2 different methods to?It doesn’t matter which method you use in the exam – what is important is that you prove that you understand the relevant of futures.
Have you watched the free lectures on options?
Sir,
I have watched the free lectures on options.
For the example 3 in Chapter 19, why we are using the rate of 1.4120 instead of being using1.4100 ?
The calculation that you taught is different with the calculation in the bpp study text, so I don’t understand clearly ?There is a profit on the options and the profit is calculated in $’s. Given that we are the the UK, this dollar receipt needs converting into pounds, and when selling $’s the relevant rate is 1.4120.
Good day Sir just on this same topic.Using example 3 we converted the $ 1,000,000 at spot rate of 1.41 giving 709220 Pounds.
Then since we decided to excercise we deducted profit gained from 709220 and added the premium.
When i use the same logic on Kenduri 6/13 question am getting confused because they converted the payment of $ 2,400,000 at the excerise rate then added the premium. why didnt they calculate the gain or loss just as we did and why didnt they first convert the $ 2,400,000 at spot then adjust for premium and any gain or loss just as you did in example 3?
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