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.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 7MC

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