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With regard to Past Exam Paper June 2013 Question 3 (a)
Could you explain why the calculations for the options in the answers are different at the exercise price of $1.60 and $1.62?
If I use the method in exercise price of $1.60, the total payment will be as follows:
1,481,481 + 30,846 = 1,512,327
Will it be an acceptable answer?
1,481,481 is converting at 1.62, which only applies if you have bought an option to convert at 1.62.
When you are considering the option at 1.60 then it is the option to convert at 1.60 which comes to a different figure (as per the answer).As regards the 30,846 then this is wrong because the price of options at $1.60 (0.0208) is different than the price of options at $1.62 (0.0342), and so the premium payable will be different.
The one thing that you could have done differently is that if you went for options at $1.62, then since you want 23.7 contracts but it has to be a whole number of contracts, then you could have gone for 24 contracts instead of 23 contract as in the answer. This would have resulted in a different final figure for the $1.62 options, but would still have got the marks.
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