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Hi John,
In this question, there were 2 strike prices for the currency option. In the answer, the examiner provided the calculation under each strike price price scenario, which was not specifically required in the question. However, do we must present calculations in all scenarios to gain full mark in exam? Can we just calculate the net receipt rate by taking strike price minus premium of put options and choose the strike price that give the highest pay-off, instead of having to show calculation for 2 scenarios?
Thanks
Don’t forget that depending on what happens to the exchange rate, the options might not be exercised but the premium will still be payable. For that reason there is no ‘best’ strike price.
Ideally in the exam you should illustrate for all strike prices available. However, if you are short of time you will still get most of the marks by just using one strike price – the marks are mostly for proving you understand how options work.
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