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Currency Options. Assume the spot USD/JPY exchange rate is 96 (1 USD = 96 JPY). The continuously compounded risk-free interest rate is 1% per annum

Currency Options.

Assume the spot USD/JPY exchange rate is 96 (1 USD = 96 JPY). The continuously compounded risk-free interest rate is 1% per annum in the US and 3% per annum in Japan. Assume that the volatility of the USD/JPY exchange rate is 25% per annum.

Calculate the USD value of a one-year European put option on one JPY with an exercise price of USD 0.011.

Show your calculations.

(Hint: there is no need to use the Black-Scholes)

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