Reading 35, page 324, problem 7. Has anyone had difficulties with this problem?
You want to hedge US/UK currency risk and do it with a call option. You are asked to determine how you wind up at the end, based on certain ex-rate outcomes.
I’m unable to figure out how the last two columns (Call at 155 and at 160) are calculated. I get very close, but not spot on. The authors are converting the option premium at some rate different than the closing spot rate.
Cost of call(1.50) at £0.03 each is £200000 – see the reading Cost of call(1.55) at £0.015 each is £100000 (1/2 of above) Cost of call(1.60) at £0.005 each is £33333 (1/3 of above) Call(1.55): Price anything below $1.55/£ the option expires out of the money and the premium is the loss: At $1.3/£ --> (15000000/1.3) - 100000 = 11438 At $1.4/£ --> (15000000/1.4) - 100000 = 10614 At $1.5/£ --> (15000000/1.5) - 100000 = 9900 Price anything above $1.55/£ the option is in the money: At $1.6/£ --> (15000000/1.55) - 100000 = 9577 At $1.7/£ --> (15000000/1.55) - 100000 = 9577 At $1.8/£ --> (15000000/1.55) - 100000 = 9577 Call(1.60): Price anything below $1.60/£ the option expires out of the money and the premium is the loss: At $1.3/£ --> (15000000/1.3) - 33333 = 11505 At $1.4/£ --> (15000000/1.4) - 33333 = 10681 At $1.5/£ --> (15000000/1.5) - 33333 = 9967 At $1.6/£ --> (15000000/1.6) - 33333 = 9342 Price anything above $1.60/£ the option is in the money: At $1.7/£ --> (15000000/1.6) - 33333 = 9342 At $1.8/£ --> (15000000/1.6) - 33333 = 9342
I too had a problem getting the option premium…
So to get to £ value, we divide $15,000,000 by 1.5… I get that. So we now have £10,000,000. Don’t we just multiply this by £0.03 to get £300,000? Why divide even further by 1.5?