Consider the option on currency HKD against the USD:

Current spot rate is HKD7.50 for 1 USD Risk-free HKD rate of interest is 5% p.a.

Risk-free USD rate of interest is 2% p.a. Volatility () of the currency returns is 20% p.a.

Maturity of the option is 3 months. Strike rate of the option is HKD8.00 for 1 USD

The currency options are European in nature

Answer the following questions.

(i) Draw the terminal payoff diagram for the holder of the currency call option on HKD. [1 mark]

(ii) Draw the terminal payoff diagram for the holder of the currency put option on USD. [1 mark]

(iii) How much does it cost to hold (i.e., buy) a call-HKD option? Use the Garman Kohlhagen model. [2 marks]

(iv) What is the minimum terminal exchange rate for the holder of the call-HKD option to profit from holding the currency option? [1 mark]

(v) How much does it cost to hold (i.e., buy) a put-HKD option? Do not use the Garman Kohlhagen mode