Can someone please help me calculate the cost of the option premium? Question facts: British exporter will receive $15 million USD. Current spot $1.5/£ Long Call price (0.03/£) - strike 1.5 (/£) Calculate the £ value when spot is $1.3/£ My answer: Option cost = 15 mil / current spot * 0.03 = $300000 £ value = (15,000,000 - 300,000)/ 1.3 = 11,307,692 Textbook answer ~11,338,000 Thank you in advance
couldn’t get the answer either, anyone can show the calc? thx!
you made a mistake NP=15mil/strike price (1.5 /£) the current option cost (£ )= NP* call price/current spot(1.5 /£)=£200,000 terminal value (£)=1.5mil/1.3-current option cost=11,338,000
Re: Wrong EOC answer! #7 of Reading 40 (Currency Risk Mgt) Posted by: janakisri (IP Logged) Date: March 15, 2011 11:07AM Yes you are right . To protect our current principle , we lock in at the current spot rate ( hoping of course to cash in on a better rate at expiry). So insured UK # = 15M USD / Spot Rate in USDperUK# Cost of insurance in USD = insured UK # * option price Cost of Insurance in UK # = insured UK # * option price / spot rate with strike of 1.55 insured UK # =15mil USD/1.55 Cost of insurance in USD =15mil. USD/1.55 * 0.015 cost of insurance in UK#=15milUSD/1.55*0.015/1.5 terminal value = 15mil/1.55 - [15milUSD/1.55*0.015/1.5] i get 9580.6. Is it rounding?