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that Australia's central bank ced plans to stabilize the Australian A$) in the foreign exchange markets. In ce to this announcement, the expectec v of the A$ declined immediately. er, the spot rate of the A$ remained at n this day and was not affected by the cement. The one-year forward rate of emained at $0.89 on this day and wa: cted by the announcement. Do you

that Australia's central bank ced plans to stabilize the Australian A$) in the foreign exchange markets. In ce to this announcement, the expectec v of the A$ declined immediately. er, the spot rate of the A$ remained at n this day and was not affected by the cement. The one-year forward rate of emained at $0.89 on this day and wa: cted by the announcement. Do you

Essentials Of Investments
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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Assume that Australia's central bank announced plans to stabilize the Australian dollar (A$) in the foreign exchange markets. In response to this announcement, the expected volatility of the A$ declined immediately. However, the spot rate of the A$ remained at $0.89 on this day and was not affected by the announcement. The one-year forward rate of the A$ remained at $0.89 on this day and was not affected by the announcement. Do you think the premium charged on a one-year A$ currency option increased, decreased, or remained the same on this day in response to the announcement? Briefly explain.
Transcribed Image Text:Assume that Australia's central bank announced plans to stabilize the Australian dollar (A$) in the foreign exchange markets. In response to this announcement, the expected volatility of the A$ declined immediately. However, the spot rate of the A$ remained at $0.89 on this day and was not affected by the announcement. The one-year forward rate of the A$ remained at $0.89 on this day and was not affected by the announcement. Do you think the premium charged on a one-year A$ currency option increased, decreased, or remained the same on this day in response to the announcement? Briefly explain.
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