# Currency Risk Management

CFAI EOC Problem #7, p. 328. The option premium in quoted in USD. In the answer key, in calculating the total premium, they (1) convert the USD value received to GBP (2) multiply this by the option premium (in USD) (3) then, convert back to GBP Step 2 confuses me. Why multiple a notional GBP amount by a rate in USD? Thanks

Neveruse_95%_everagain Wrote: ------------------------------------------------------- > CFAI EOC Problem #7, p. 328. > The option premium in quoted in USD. > > In the answer key, in calculating the total > premium, they > > (1) convert the USD value received to GBP They specifically said \$ 300,000 or GBP 200,000 I believe both should be ok. > (2) multiply this by the option premium (in USD) Because that’s the way it’s laid out in the table- I think > (3) then, convert back to GBP > > Step 2 confuses me. Why multiple a notional GBP > amount by a rate in USD? > > Thanks

I think it shall be an error. Option premium = Pound 10M x 0.03 = 0.3 M (or 0.3M x 1.5 = \$0.45)

I think it shall be an error. Option premium = Pound 10M x 0.03 = Pound 0.3 M (or 0.3M x 1.5 = \$0.45)

I think it shall be an error. Option premium = Pound 10M x 0.03 = Pound 0.3 M (or 0.3M x 1.5 = \$0.45M)

Do you think it is an error ?

Sorry AMC… I do think it’s an error. Will check the errata page later on… thx

Pound 10M x \$0.03/pound = \$0.3 M Strike \$1.5/pound \$0.3m/1.5 = 2m pound

Yes, I get bit. Its not an error.