- This topic has 1 reply, 2 voices, and was last updated 4 years ago by
John Moffat.
John Moffat.-
Posts
-
adurich
- Topics: 127
- Replies: 120
- ☆☆☆
Hello
Could you please help me with the interpretation of this qs answer :
About options
Should I assume that in the kit the answer assumes that we are excercise the option ! Am I right ??
Because the answer doesn’t compare it with the given spot
And if for our own understanding we use spot rates …I have to just be sure that I use the forward rates which are going to be after 3 months just to be sure that if they are better than the option strike price …So to understand if I use forward rate of 1.5996 and the excercise price given for options .let’s say 1.60 ..so it is better and we decide to excercise the option ..and these are the calculations shown in answer
Am I right ??
Just to be sure …I should not compare the excercise price with the original given spot rate ..because the rates later in 3 months would change …and that are the forward rates that I should compare with the excercise price ?? Am I right to understand it sir ??
So transaction convert at spot I get 2.4m/ 1.5996=1500375
Excercise option 24 contracts * 62500(contract size) *(1.60-1.5996)=600$ .convert it at spot ( that is ..forward rate : 600/1.6037)=374pounds this we receive ……( Here when I convert have I used correct rate or should I use spot rate original which is 1.5962??
Am I correct ??
Please guide
Thanks for your response and lectures
John Moffat
- Topics: 57
- Replies: 50627
- ☆☆☆☆☆
Whether the options are exercised or not depends on whether the spot rate in 3 months time is higher or lower that the exercise price.
Since the don’t know what the spot rate will be in 3 months time, the answer has calculated the ‘worst’ outcome (which is the outcome if the options were to be exercised)
The 3 month forward rate has nothing to do with the spot rate in 3 months time – it would be extraordinary if the spot rate in 3 months time turned out to be the same as the 3 month forward rate that is quoted now.
John Moffat- You must be logged in to reply to this topic.