- 7 Marks
FM – Nov 2020 – L2 – Q3b – Futures and hedging with futures | Hedging with options
Explain intrinsic value of an option and calculate the intrinsic value for USD/GH¢ call options over several months.
Question
i) Explain the term intrinsic value of an option. (1 mark)
ii) DUU Ghana Ltd bought USD/GH¢ call options from KASA Ltd. The table below shows the various spot rates and strike prices for the various tenors.
| Month | Spot Rate USD/GH¢ | Exercise Rate/Price USD/GH¢ |
|---|---|---|
| 1 | 5.1 | 4.8 |
| 2 | 5.3 | 5.0 |
| 3 | 5.5 | 5.4 |
| 4 | 5.8 | 5.8 |
| 5 | 5.7 | 6.0 |
| 6 | 6.0 | 6.4 |
Required:
Determine the intrinsic value of the option for each trading month and clearly indicate the months in which the option is in-the-money, at-the-money, or out-of-the-money. (6 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Currency risk, Hedging, Intrinsic value, Options
- Level: Level 2
- Topic: Futures and hedging with futures, Hedging with options
- Series: NOV 2020
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