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Q 68 (KAPLAN REVISION KIT) DEC 10 – MARENGO CO

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Q 68 (KAPLAN REVISION KIT) DEC 10 – MARENGO CO

  • This topic has 4 replies, 3 voices, and was last updated 10 years ago by John Moffat.
Viewing 5 posts - 1 through 5 (of 5 total)
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    Posts
  • November 20, 2014 at 6:25 pm #211716
    judezz91
    Member
    • Topics: 11
    • Replies: 8
    • ☆

    Sir please explain why the question asks us to compute no. of PUT option contracts? the scenario is that we want to hedge against reducing share price. should’nt the hedging strategy be to sell CALL options?

    November 20, 2014 at 10:29 pm #211757
    muneebnawaz90
    Member
    • Topics: 10
    • Replies: 76
    • ☆☆

    Risk : share price go down

    For example :

    Share price ( today ) 100

    Share price after 2 months : 95

    What will be your hedge strategy ? Obviously right to sell now at 100 and buy at 95
    ( right to sell now is put )

    Situation after 2 month
    Share price 95
    Gain on options 5
    So risk hedged.

    P.S it cant be equal because of options premium. Which i didnt consider in example. And wait for tutor reply for more detail.

    November 21, 2014 at 12:28 pm #211879
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54655
    • ☆☆☆☆☆

    You could do either – buy PUT options or sell CALL options.

    However, if the question asks you to deal in put options then you will buy put options (and therefore have the right to sell at a fixed price, if the share price falls.

    November 22, 2014 at 6:27 am #212073
    judezz91
    Member
    • Topics: 11
    • Replies: 8
    • ☆

    all right!! thank you Mr. John & Mr. Muneeb 🙂

    November 22, 2014 at 11:05 am #212157
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54655
    • ☆☆☆☆☆

    You are welcome 🙂

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    Posts
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