Question
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.
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.
- Draw the terminal payoff diagram for the holder of the currency call option on HKD. [1 mark]
- Draw the terminal payoff diagram for the holder of the currency put option on USD. [1 mark]
- How much does it cost to hold (i.e., buy) a call-HKD option? Use the Garman Kohlhagen model. [2 marks]
- What is the minimum terminal exchange rate for the holder of the call-HKD option to profit from holding the currency option? [1 mark]
- How much does it cost to hold (i.e., buy) a put-HKD option? Do not use the Garman Kohlhagen model. [2 marks]
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Fundamentals Of Contemporary Financial Management
Authors: R. Charles Moyer, James R. McGuigan, Ramesh P. Rao
2nd Edition
0324406363, 978-0324406368
