CFAI vol 5 pg 301 #7, options on calls

CFA Level III Derivatives
#1

This may have already been discussed but - CFAI vol 5 pg 301 #7,

I am a British exporter, I am receiving USD in 3 months, so I want the USD to go up as much as possible b/c why???

  • Let’s say I make chairs that cost GBP 50.

  • The FX rate is currently $1.50 per 1 GBP. Therefore for my GBP 50 chair, I will get paid 75 in 3 months. I am worried in the meantime about the declining…like if the rate moved to $1.75 per 1 GBP, then I will get $87.50…? So what? Don’t I still get GBP 50?

  • I would love if the rate moved to $1.25 per 1 GBP, b/c then I will get paid $62.50, and then convert back to GBP to get ….?

Thanks,

Andrew

#2

That depends: is your contract written for you to get paid in USD or in GBP?

Whenever I teach in another country I make sure that my contract specifies that I get paid in USD; that way I don’t have any exchange rate risk.

Again, it depends on the currency in which you have the agreement.

My pleasure.

#3

It says you are receiving USD in 3 month, that means you are receiving a fix amount in USD dispite the exchange rate changes.

In your chair example, you will receive $75 by contract. (unless buyer defaults).

Then you want to convert back to your GBP, and as much as possible.

That’s why you want to 1 usd to equals to 2 GBP if that’s possible.

Hope this helps…

#4

Thanks!!! For some reason I thought it was contracted at GBP 50. This makes perfect sense now. Good luck.

#5

you’re long USD / short GBP. If the USD goes down relative to GBP , your repatriation into GBP will suffer

Your hedge should be short USD / long GBP.

So if the USD goes down , your hedge would cover the long position in USD.

If the hedge is too expensive in your estimation , then don’t hedge