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You are considering to hedge the currency risk using option. Suppose that the spot price...

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Finance

  1. You are considering to hedge the currency risk using option. Suppose that the spot price of the Singapore dollar is U.S. $0.95 and that the Singapore dollar/U.S. dollar exchange rate has a volatility of 8% per annum. The risk-free rates of interest in Singapore (foreign) and the United States (home) are 4% and 5% per annum, respectively. Calculate the value of a European call option to buy one Singapore dollar for U.S. $0.95 in nine months. Use put-call parity to calculate the price of a European call option to sell one Singapore dollar for U.S. $0.95 in nine months. Answer: c = 0.95e-0.040.750.55580.95e-0.050.750.5293 = 0.0290

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