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Option on currency hkd against the usd

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Reference no: EM133057008

Q1. 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 (σ) 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) How much does it cost to hold (i.e., buy) a call-HKD option? Use the Garman Kohlhagen model.

Reference no: EM133057008

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