Page 161 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Currency risk management

Example 8

This situation will be a call.

Choosing a strike price and date.

From the options available choose the strike price that is closest to the current
spot rate. Remember the aim is to create certainty and keep the costs of doing
so to a minimum.

In this example it would be either 1.4700 or 1.4800, as the premium is much
lower for 1.4800 we’ll use that.

In terms of dates, the receipt is in Sept, so we should use that.

Number of contracts

As with futures we need to get the transaction and contract in the same
currency.

Use the strike price to convert.

$12.5 million / 1.4800 = £8,445,946

Contract size = £31,250

8,445,946/31,250 = 270.27

Using the usual rules of rounding, 270 contracts (this will lead to a slight under
hedge.)

Step 2

Pay the premium

The premium for May expiry and strike price of 1.4800 is 2.54 cents per £.

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