In: Finance
Q.4(30p) Assume that the spot price of the Canadian dollar, CAD, is 0.7140 USD (USD per CAD). Assume also that the CAD/USD exchange rate has a volatility of 12% per annum. The risk-free rates of interest in Canada and the United States are 0.50% and 0.80% per annum, respectively. Exchange rate between USD and CAD (Canadian dollar) is 0.7140.
(If you wish, you can find out the value of put option using BSM formula and see if you get the same result as using the put-call parity. If you do not get the same results, then you must have made a mistake in calculating the put option using the BSM formula. However, the numbers are so close and you can make rounding along the way may give rise to different results. So, as long as you get quite close numbers, then it should be fine)
[The put-call parity for European currency options is given on p.338, text. And I provide it here: Put-Call Parity Condition for European Currency Options is given by]
c+Ke-rT= p+S0e-rfT