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4) A financial institution has just bought 8-month European call options on the Chinese yuan. Suppose that the spot exchange rate is 14 cents per
4) A financial institution has just bought 8-month European call options on the Chinese yuan. Suppose that the spot exchange rate is 14 cents per yuan, the exercise price is 15 cents per yuan, the risk-free interest rate in the United States is 2.5% per annum, the risk-free interest rate in China is 4.5% per annum, and the volatility of the yen is 15% per annum. Calculate vega of the financial institutions position. Check the accuracy of your vega estimate by valuing the option at a volatility of 15% and 15.1% sequentially.
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