A financial institution has just bought 4-month European call options on the Chinese yuan. Suppose that the spot exchange rate is 14 cents per yuan, the exercise price is 15 cents per yuan, the risk-free interest rate in the United States is 1.5% per annum, the risk-free interest rate in China is 3.5% per annum, and the volatility of the yen is 16% per annum. Calculate the gamma of the financial institution’s position. Check the accuracy of your gamma estimate for a 0.1 cent increase in yuan.
A financial institution has just bought 4-month European call options on the Chinese yuan. Suppose that the spot exchange rate is 14 cents per yuan, the exercise price is 15 cents per yuan, the risk-free interest rate in the United States is 1.5% per annum, the risk-free interest rate in China is 3.5% per annum, and the volatility of the yen is 16% per annum. Calculate the gamma of the financial institution’s position. Check the accuracy of your gamma estimate for a 0.1 cent increase in yuan.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A financial institution has just bought 4-month European call options on the Chinese yuan.
Suppose that the spot exchange rate is 14 cents per yuan, the exercise price is 15 cents per yuan,
the risk-free interest rate in the United States is 1.5% per annum, the risk-free interest rate in China
is 3.5% per annum, and the volatility of the yen is 16% per annum. Calculate the gamma of the
financial institution’s position. Check the accuracy of your gamma estimate for a 0.1 cent increase
in yuan.
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