Can someone help me with question 7 page 324 of vol 5, reading 35?
the solution doesn’t show how to calculate call 155. please use 1.7 exchange rate as an example.
what i’m I calculating wrong?
option premium=$15m*(1/1.55)*(0.015)(1/1.50)=96,777
profit=(15m/1.55)-(15m/1.7)=$853,889
net profit on the position=853,889-1,176,471-96,77=-419,355
hedge port value=(15m/1.55)=9,677-419=9,258
i’m not getting 9,577
please help!
All in '000
Option Premium = (15000/1.5) * (0.015/1.7) = 88.235
Portfolio Value = 15000/1.7 = 8823.53
Call Gain = 15000 * (1/1.55 - 1/1.7) = 853.890
Net = 8823.53 + 853.890 - 88.235 = 9589.195
the solution is 9577
9589 is the best I can come up with.
it looks to be a rounding thing. let us see what others come up with.
Mistake is in option premium guys.
Portfolio Value = 15000000/1.7=8823529
Option Premium=(15000000/1.5)*0.015/1.5=100000
Call Payoff=15000000*(1/1.55-1/1.7)=853889
TOTAL=8823529-100000+853889=9577418
here option premium calculation is confusing.
We have to convert it twice i mean first we need to know what is the value of receivable in pound since option quotes are $ / pound…so so dollar receivable divide by current spot = value in pound x option quote in dollar than again covert that in pound using current rate (since exporter is british)
during exam hours all these lead to confuse us & consume time…
i’d rather do these calculations than try and recall some non-issue about some vague topic…lol
Alladin’s method is the best to me. Currency call payoff is different from a traditional option payoff – exercised rate is inversed sometimes. TheCfaway’s way to calculate the payoff is easy to understand.
The option premium is paid in front and in £, so it ignores the borrowing cost. This is different from effective interest rate calculation. The solution on p329 only makes me confused.
Can you please give me the formula calc for the option premium in this case? Dont we have to divide the 15M by strike price and then * into premium cost?
Nothing to do with the strike rate…
its 15m / current spot rate = “X” amount of pounds…Option quotes are in $/pound so multiply with option premium = “Y” amount of dollars. .again divide by current spot rate since you are a britisher
This would depend on the option quotation & your domestic country…I guess!
i want to use the same calc to get the cash value in a 1.3$/£ scenario insuring it with an option that costs .015£ Strike-X1.55$
Portfolio Value = 15000000/1.3=11,538K£ Option Premium=(15000000/1.5)*0.015/1.5=100K Call Payoff=15000000*(1/1.3-1/1.55)=1,861K TOTAL==11,538K-100K+1,861K=£13,299K But,the answer is £11,438K – looks like the call payoff piece is completely ignored. Am I missing sthg here? Can up lease help?
call payoff would be only when the currency rate goes above 1.55 … so 1.3 would not have a payoff.
it is 15M * (1/1.55 - 1/1.3) which is negative - hence 0.