Question

I want to know about why the calculation “A would buy an option of the following...

I want to know about why the calculation “A would buy an option of the following notional principal” is “=+B4/B14.” From this calculation I think the unit becomes “pound sterling^2/$.” But the result is shown as just “pound sterling.” Why does the unit become so?

B4 is Potential investment principal per person (Pound sterling: GBP) The value is 250,000.

B14 is Put options on pounds: Premium. The unit is USD/GBP. $0.00333.

So I think if I calculate B4/B14 the unit becomes strange. GBP^2/USD. But the answer is GBP. 75,075,075.08.

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Answer #1

If I understand correctly, the question is how much is the notional principal for underlying options and how much would be the premium. You are absolutely correct in arriving at the strange units. This is because, the calculation is not performed correctly. One cannot divide investment value by premium amount to arrive at the notional principal. The calculation should be as follows-
The notional principal for purchasing/ selling option is the total investment value of the investment. In this case, it is GBP 250,000.
The premium is quoted as USD per GBP. This implies that the premium is paid in USD (base currency). The premium for total notional principal is 0.00333*250000= USD 832.5. The unit for this amount is USD/ GBP * GBP= USD.

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