Page 208 - AFM Integrated Workbook STUDENT S18-J19

Chapter 10

Which exercise price?

Exercise price Premium (c) Premium ($) Net

1.2000 1.09 0.0109 1.1891

1.2200 2.58 0.0258 1.1942

Choose the 1.2200 exercise price (higher net receipt of US$)

Contact the exchange: We need to buy 48 March put options at an exercise
price of US$1.2200 to €1.

Premium = US$0.0258 x 48 contracts x €250,000 = €309,600

Result of hedge (assuming the spot rate on 31 March is such that the options
are exercised):

48 contracts x €250,000 x 1.2200 = US$14,640,000

Net US$ cash flow = 14,640,000 – 309,600 = US$14,330,400

Illustrations and further practice

Now try TYU 4 and TYU 5 in Chapter 10

196