9.7

3.5%, what is the spot exchange rate? 9.7 Suppose the dollar-denominated interest rate is 5%, the yen-denominated interest rate is 1% (both rates are continuously compounded), the spot exchange rate is 0.009 .$4, and the price of a dollar-denominated European call to buy one yen with 1 year to expiration and a strike price of $0.009 is $0.0006 a. What is the dollar-denominated European yen put price such that there is no arbitrage opportunity? b. Suppose that a dollar-denominated European yen put with a strike of $0.009 has a premium of $0.0004. Demonstrate the arbitrage. c. Now suppose that you are in Tokyo, trading options that are denominated in yen rather than dollars. If the price of a dollar-denominated at-the-money yen call in the United States is $0.0006, what is the price of a yen-denominated at-the-money dollar call-an option giving the right to buy nominated in yen-in Tokyo? What is the relationship of this answer to your answer to (a)? What is the price of the at-the-money dollar put? one dollar, de- 9.8 Suppose call and put prices given by are Strike 50 55 Call premium Put premium 10 7 6 What no-arbitrage property is violated? What spread position would you use to effect arbitrage? Demonstrate that the spread position is an arbitrage. 3.5%, what is the spot exchange rate? 9.7 Suppose the dollar-denominated interest rate is 5%, the yen-denominated interest rate is 1% (both rates are continuously compounded), the spot exchange rate is 0.009 .$4, and the price of a dollar-denominated European call to buy one yen with 1 year to expiration and a strike price of $0.009 is $0.0006 a. What is the dollar-denominated European yen put price such that there is no arbitrage opportunity? b. Suppose that a dollar-denominated European yen put with a strike of $0.009 has a premium of $0.0004. Demonstrate the arbitrage. c. Now suppose that you are in Tokyo, trading options that are denominated in yen rather than dollars. If the price of a dollar-denominated at-the-money yen call in the United States is $0.0006, what is the price of a yen-denominated at-the-money dollar call-an option giving the right to buy nominated in yen-in Tokyo? What is the relationship of this answer to your answer to (a)? What is the price of the at-the-money dollar put? one dollar, de- 9.8 Suppose call and put prices given by are Strike 50 55 Call premium Put premium 10 7 6 What no-arbitrage property is violated? What spread position would you use to effect arbitrage? Demonstrate that the spread position is an arbitrage