Page 234 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Chapter 16

Example 8

Philadelphia SE $/£ options with a contract size of £31,250 (cents per £1)

Strike Calls Puts
Price
March June Sept March June Sept

1.4600 1.59 2.48 3.09 0.10 1.04 1.89

1.4700 0.87 1.90 2.81 0.36 1.48 2.06

1.4800 0.67 1.41 2.54 0.85 1.98 2.34

All premiums are quoted in cents per £1

Options Plc, a UK company, is due to receive $12.5 million from a customer
based in the USA in Sept. The current spot rate is $1.4740:£1. Options Plc are
concerned that the $ is expected to weaken over the next few months.

Required: Using the data show how traded currency options could be
used to hedge this transaction. Assuming that the spot rate in Sept is

(ii) 1.6000

Solution

Step 1

Call or put option?

This is driven by the currency the contract is in.

Learn this table:

Contract currency Receipt Payment

Contract in £ Call Put

Contract in $ Put Call

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