Currency Options

Question 1

Step 1

Answer 1

Determine the number of contracts

Question 2

Step 2

Answer 2

Determine whether you want to purchase call or put sterling options

Non uk companies receiving GBP should purchase PUT options (I.e sell GBP)

Non uk companies paying GBP should purchase call options (I.e BUY GBP

uk companies receiving non GBP currency should purchase call options (I.e buy GBP)

Uk companies paying non gbp currency should purchase put options (I.e sell GBP)

Question 3

Step 3 pt 1

Answer 3

Combine steps 1 and 2 in a statement

Question 4

Step 3 pt 2

Answer 4

Calculate option premium payable

3 facts to identify the correct option premium payable per £

The month the transaction is expected to take place

Whether call or put options are needed

The exercise/strike rate desired by the company

Question 5

Step 4

Answer 5

Buy or sell the transaction currency amount on the open market at the current spot rate

If selling currency it will be positive

If buying it will be negative

Question 6

Step 5 pt 1

Answer 6

Decide whether to exercise or not

If selling rate > buy rate then profit so do exercise the option

If sell rate < buy rate then loss so do not exercise the option

Question 7

Step 5 pt 2

Answer 7

Exercise option and calculate profit

Total profit = contracts x contract size x non gbp profit per £

Question 8

Step 6

Answer 8

Calculate net receipt

Add together final values