Page 236 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx
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Chapter 16
Example 8
Hedge amount = 270 × £31,250 = £8,437,500
Premium = £8,437,500 × $0.0254/£ = $214,312.50
This must be paid now, so the spot rate is used to get the £ amount.
$214,312.50 / $1.4740 = £145,395.18
The hedge is now set up. 270 call options at a strike price of £1:$1.4800
Step 3
Closing out
(i) Buy at strike price: –1.4800
Sell at spot: 1.4000
Net: –0.0800
Therefore let it lapse.
4
Translate at the market rate: $12,500,000/1.4000 = £8,928,571
Less the premium (£145,395)
Net receipt £8,783,176
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