Details provided : Amount to be paid = 1.2 mln pounds, current exchange rate : 1GBP = 139.577, UK risk-free rate = 3.5% Japanese risk-free rate = 4%, historical volatility of exchange rate = 10% and time = 0.25
a = e^(r-q)t = 1.001251
u = e^(volatility*squareroot(t)) = 1.051271
d = 1/u = 0.951229
p = (a-d)/(u-d) = 0.50005
current price of call option = 3.573
Since interest rate is higher in Japan it will depreciate yen against pounds and hence the importer should freeze the price with call option
PROBLEM №5 A Japanese importer is planning to pay 1.2 mln British pounds for goods to...
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