Exchange traded currency options - part 2

In this lesson

1. 0:00 Exchange traded options worked example
2. 0:58 Identifying the option type needed
3. 3:01 Determining contract requirements
4. 4:41 Calculating option premium costs
5. 6:16 Applying the transaction at spot rate
6. 6:56 Deciding to exercise or lapse options
7. 8:30 Computing net outcome and effective rate
8. 9:50 Key takeaways on options terminology

About this lesson

This step-by-step methodology is essential for FM and AFM exam questions involving hedging currency risk. The video walks you through eight key stages using Dales Way plc, a UK company receiving $10 million from a US customer. You'll see how to extract premium information from options tables (being careful with decimal placement), convert between currencies to compare like with like, and decide whether to exercise or allow options to lapse based on spot rate movements. The worked example demonstrates that even when exchange rates move favourably, the premium cost must be factored into your final net outcome and effective exchange rate calculation. By the end, you'll understand the complete mechanics of exchange traded options hedging: from initial setup through to calculating your actual pounds received. This is a challenging calculation with many steps, but the process is highly repetitive. Once you've worked through a few examples, you'll build confidence and speed, making these questions a reliable source of marks in your exam.

Duration: 11m