Good afternoon Sir!
2 questions: refers to the currency futures and option part b-ii.
1. futures: he is calculating the #contract by using the lock-in rate (.865) and i am calculating the contracts by using the rate of the June futures: .8656. even tho the difference is small, what i did was correct?
2. options: he says that the option will be allowed to laspe.
and i am saying that the option will be exercised!!
why?
given that we have bought a call option, and that we exercise a call when the ex. price < market price AND that the euro is expected to slide, this means that EP will be lower than the euro exhange rate.
the EP = .860 and even the current spot of $/e 1.1618 = .8607 and thus EP is almost guaranteed to be below the market value.
so why wdnt we exercise the option?
regards
Ask the Tutor ACCA AFM
Q1 - Mar/Jun16 Sample
sir... pls answer my query.. thank u
9y ago#2Sorry - I don't know how I missed your question first time :-(
1. What you have done is fine. There are arguments both ways so no problem in the exam.
2. I think you are misreading the answer.
Whether or not the options are exercised depends on what actually happens to the spot rate. What the answer is saying is that if the € does strengthen then the option will be allowed to lapse (but otherwise it would be exercised). Given the circumstances he is saying it will be unlikely that the options would be worthwhile.
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