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A UK manufacturing company has simultaneously:
* purchased a put option to sell USD 1million at an exercise price of GBP1.00 = USD1.65
* sold a call option that grants the option holder the right to buy USD 1million at a price of GBP1.00 = USD1.61(this option has the same maturity date as the put).
Which of the following is a valid explanation for entering into these option positions?
Suggested Answer: B, C, E
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44 comments · newest first
MI
Michell
11 months ago
Wait, why would they sell a call if they expect to pay in USD?
SU
Susana
11 months ago
They’re definitely expecting USD to strengthen!
AL
Alease
11 months ago
Not so sure about D, seems risky to me.
KA
Karima
12 months ago
I think option C makes the most sense here.
MI
Micaela
12 months ago
The company is hedging against currency risk.
MI
Mitzie
1 year ago
I think the company is expecting to receive USD, so option C makes sense since they want to benefit if the USD strengthens. But I'm not completely confident.
IZ
Izetta
1 year ago
I feel like the call option is meant to offset some costs, but I can't recall if it's better for receiving or paying USD. Maybe it's option A?
LO
Loise
1 year ago
This question seems similar to one we practiced where a company hedged its foreign exchange risk. I think the put option is for protection if they receive USD.
BE
Beula
1 year ago
I remember studying how companies use options to hedge against currency fluctuations, but I'm not sure which option position aligns with receiving or paying USD.
YV
Yvonne
1 year ago
I'm pretty confident that the answer is D. The company is trying to hedge its exposure to a USD payment, and the put option provides that protection while the call option offsets the cost.
NA
Nadine
1 year ago
I'm not entirely sure about this one. The options positions seem to be offsetting each other, so I'm not sure what the company's overall strategy is. I'll have to think about it some more.
OR
Oren
1 year ago
I think the answer is D. The company expects to pay USD 1 million to a supplier, so they want additional protection against the USD strengthening beyond GBP 1.00 = USD 1.65.
CH
Chau
1 year ago
Okay, let me think this through. The company has bought a put option and sold a call option, both on USD 1 million. The key is to figure out why they would do this.
MA
Maia
1 year ago
This question seems straightforward, but I want to make sure I understand the details correctly before answering.
EM
Emilio
1 year ago
I'm pretty sure the first step is to identify the customer requirements. That seems like the logical starting point for QFD.
SH
Sheron
1 year ago
Whoa, this is a lot of information to take in. Let me read through the question carefully and make sure I understand exactly what I need to do. Gotta get this right on the exam.
LA
Lacey
1 year ago
I'm pretty confident the answer is D. The question is asking about the benefit of SmartTier, and the description of D - the transparent move of data based on policies - seems to capture the core functionality and advantage of that technology.
PA
Patrick
1 year ago
I'm not entirely sure, but I remember practice questions discussing performance benchmarking when evaluating fill rates. Maybe that's the right one?
CA
Carissa
1 year ago
This is a tricky one. I'll need to think carefully about the differences between the authentication techniques to determine which one can't be revoked or reissued.
LA
Lachelle
1 year ago
Alright, folks, no peeking at each other's answers! This isn't a team sport... unless you're planning to start a hedge fund together after the exam.
GR
Gregg
1 year ago
D) The company expects to pay USD 1million to a supplier and wishes to obtain additional protection against the USD strengthening beyond GBP 1.00 = USD 1.65.
VA
Vashti
1 year ago
B) The company expects to pay USD 1million to a supplier and wishes to offset the premium from the call option against the cost of the put option.
LI
Lina
1 year ago
C) The company expects to receive USD 1million from a customer and wishes to obtain an additional benefit if the USD strengthens beyond GBP 1.00 = USD 1.61.
ET
Ettie
1 year ago
A) The company expects to receive USD 1million from a customer and wishes to offset the cost of the put option by the premium on the call option.
JA
Javier
1 year ago
Ha! These options are like a financial version of 'choose your own adventure.' I'll go with D, but I'm secretly hoping for a hidden 'all of the above' answer.
LI
Lilli
1 year ago
Yeah, D seems like the most logical choice to mitigate any risks.
CA
Carry
1 year ago
I agree, D seems like the safest option to protect against any unexpected changes.
BE
Benton
1 year ago
I think D makes sense, it's all about protecting against the USD strengthening.
BE
Bettye
1 year ago
Option C seems a bit too optimistic. The company is probably more concerned with managing their risk than trying to profit from a potential USD appreciation.
CL
Claudio
1 year ago
A: Option C does seem a bit optimistic, they're likely focused on minimizing potential losses.
EV
Evette
1 year ago
B: I agree, managing risk is probably their main goal.
RE
Rex
1 year ago
A: I think option D makes more sense. The company wants protection against the USD strengthening.
MA
Makeda
2 years ago
Interesting, I was leaning towards option B at first, but the explanation for option D seems more comprehensive. Gotta pay attention to those details!
NO
Novella
1 year ago
Yeah, paying attention to those details is crucial in these situations.
FR
Freeman
1 year ago
I agree, option D does seem like a more comprehensive explanation.
MA
Maddie
1 year ago
Yes, it's important to consider all the details when entering into these option positions.
JA
Jaleesa
1 year ago
I agree, option D does seem to provide more protection against the USD strengthening.
WH
Whitley
2 years ago
Hmm, the key here is the company's expectations. I think option D makes the most sense, as the company wants to protect itself against the USD strengthening beyond a certain point.
JA
Janine
2 years ago
But wouldn't the company want to protect against USD strengthening, so D makes more sense?
CL
Clare
2 years ago
I disagree, I believe the answer is D.
JA
Janine
2 years ago
I think the answer is C.
IN
India
2 years ago
But wouldn't the company want to protect against USD strengthening, so D makes more sense?
MA
Malcolm
2 years ago
I disagree, I believe the answer is D.
IN
India
2 years ago
I think the answer is C.