Q.4 Contingent assets and currencies (25pts)

a) Using the Garman-Kolhagen (1983) formula, calculate the price of an exchange rate call given the following information:

- spot exchange rate 1.58S/E; strike price 1.60S/E; USD rate: 3.1%; GBP rate: 4.0%; volatility:

19%6; maturity: 0.25 year.

b) From your results obtained in a), calculate the Delta, Gamma, Theta, elasticity, Vega and Rho of the option.

c) Define and explain implied volatility in the context of the Garman-Kolhagen formula.

d) Define the different types of exotic options on exchange rates.

e Establish valuation formulas for a currency swap in terms of the bond portfolio and the

FRA. From the following information, calculate the value of this swap in terms of FRA:

A financial institution entered into an annual payment swap whereby it receives 5.2% in yen and pays 8.4% in US dollars. Spot exchange rate: 111V/S; the LIBOR/Swap term structure is flat: US interest rate: 9.2%, Japanese interest rate: 4.3%; main: 10.75 million US and 1.23 billion yen; the remaining life is 4 years.