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Question Kenduri Co (June 2013)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Question Kenduri Co (June 2013)

  • This topic has 3 replies, 2 voices, and was last updated 6 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • May 23, 2019 at 5:16 pm #517036
    bik123
    Member
    • Topics: 57
    • Replies: 81
    • ☆☆

    Dear Tutor,

    please advice on point a) of Kenduri question.
    In regards to option why we are not calculating gain/loss on option, just amount to pay based on exercise price, premium, and unhedged amount? Shouldn’t we state if we exercise option or not? and if so what is gain on option?

    Thank you

    May 23, 2019 at 5:23 pm #517038
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Firstly there is never going to be a loss using options!! If there was going to be a loss then they would not be exercised!

    Secondly, we do not know what the future spot rate will be, and so the calculations on options are showing what the worst outcome can be.

    Have you watched my free lectures on foreign exchange risk management?

    May 23, 2019 at 6:01 pm #517041
    bik123
    Member
    • Topics: 57
    • Replies: 81
    • ☆☆

    Yes I did watch lectures. This what I wanted to double check, that there is no future spot rate, I was not sure about that.

    So just to clarify worst case scenario is:

    Amount to be paid in foreign currency/Exercise price
    +premium
    +under/over hedge based forward rate (if applicable)

    IF spot rate would be given, and currency movement would be favourable, we are not exercising option but convert on favourable spot rate. Premium is still paid obviously.

    Thanks to option, max downside risk is amount of premium paid.

    Thank you for explanation in advance.

    May 24, 2019 at 9:16 am #517105
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Yes – that is all correct 🙂

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    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Question Kenduri Co (June 2013)’ is closed to new replies.

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