International Financial Management
International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Pls don't use gpt pls. Thanks!

Question 3:
The spot exchange rate of the Canadian dollar (CAD) is 0.95 USD, with implied volatility of 10%.
The risk-free interest rates in Canada and the United States are 2% and 1% (continuously compounded),
respectively.
(1) Find the price of a one-year European call: right to buy one CAD for 0.98 USD
(2) Find the price of a one-year European put: right to sell one CAD for 0.98 USD
1
(3) Find the price of an option to buy 0.98 USD with one CAD in one year
(We have not seen currency options in class. However, they can also be priced using the BSM model.
The only thing you need to do is to treat the interest rate on one of the currencies as a dividend yield. You
have to decide on which currency. Give a one-sentence explanation for your decision.)
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Transcribed Image Text:Question 3: The spot exchange rate of the Canadian dollar (CAD) is 0.95 USD, with implied volatility of 10%. The risk-free interest rates in Canada and the United States are 2% and 1% (continuously compounded), respectively. (1) Find the price of a one-year European call: right to buy one CAD for 0.98 USD (2) Find the price of a one-year European put: right to sell one CAD for 0.98 USD 1 (3) Find the price of an option to buy 0.98 USD with one CAD in one year (We have not seen currency options in class. However, they can also be priced using the BSM model. The only thing you need to do is to treat the interest rate on one of the currencies as a dividend yield. You have to decide on which currency. Give a one-sentence explanation for your decision.)
Question 4:
The option market does not allow for arbitrage, and the price of stock ZZ is $100. The price of a
European put option written on ZZ with a strike of $100 is $10. The price of a European put with the same
maturity written on ZZ with a strike of $50 is:
(1) lower than $5
(2) equal to $5
(3) higher than $5
(4) we can't tell
(5) none of the above
Do NOT try to use any involved calculation, and certainly NOT the Black-Scholes formula (note that
expand button
Transcribed Image Text:Question 4: The option market does not allow for arbitrage, and the price of stock ZZ is $100. The price of a European put option written on ZZ with a strike of $100 is $10. The price of a European put with the same maturity written on ZZ with a strike of $50 is: (1) lower than $5 (2) equal to $5 (3) higher than $5 (4) we can't tell (5) none of the above Do NOT try to use any involved calculation, and certainly NOT the Black-Scholes formula (note that
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