Currency risk mgmt , P No 324 EOC # 6 & 7

CFA Level III Derivatives
#1
  1. Call pounds quotes:

Strike - 1.50 Call pound - 0.03 /pound. Exporter will receive 15 million

  1. How do you calculate premium to be option: Is it

Since quotes are in per pound so you need to hedge 15 million divide by 1.5 (current spot rate or 1.3, 1.4, 1.5, 1.6, 1.7, and 1.8 dollar per pound as the case) = $ 10 million X 0.03 = 300,000 but it also divide it by strike rate or what?

  1. Why do we need to assume to we cab borrow pounds at zero interest rate?

Ques 6 B) Pls simplify for me: answer

#2

Hi , I don’t know if this is optimal, but this is how I did it :

[7]

Step 1.Convert FC exposure (15000000USD) to DC (10000000GBP) @ 1.5 USD/GBP

Step 2.Calculate Premium in FC : 10000000GBP*0.03(USD/GBP)=300000USD

Step 3.Convert Premium to DC : 300000USD / 1.5=200000GBP

Hope this is right

:stuck_out_tongue: