Discuss CIMA CIMAPRO19-P03-1 Exam Topic 6 Question 110

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?

AThe 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.

BThe 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.

CThe 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.

DThe 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.

Suggested Answer: A

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12 comments · newest first

Pa 2 months ago

I lean towards option D. Extra protection is crucial for payments.

Linn 2 months ago

I disagree. Option C is better. They can benefit if USD strengthens.

Lynelle 2 months ago

I think option A makes sense. They want to hedge their USD income.

Keena 2 months ago

Wait, how does offsetting premiums even work in this case?

Ailene 2 months ago

D) sounds right, they need protection against a stronger USD.

Lawana 2 months ago

C) is interesting, but why would they want to sell a call then?

Zena 3 months ago

I disagree, B) is more likely since they might be paying a supplier.

Garry 3 months ago

A) makes sense if they're expecting to receive USD.

Delmy 3 months ago

I recall something about using options to offset costs, so maybe option B is right, but it seems a bit off since they’re selling a call.

Letha 3 months ago

I feel like option C could also be valid since they might want to benefit if the USD strengthens, but I'm not completely confident.

Leatha 3 months ago

I think option A makes sense because if they're expecting to receive USD, they would want to protect that amount with the put.

Kent 3 months ago

I remember we discussed how companies use options to hedge against currency fluctuations, but I'm not sure which option fits best here.

CIMAPRO19-P03-1 Exam - Topic 6 Question 110 Discussion