Medecins sans Frontieres has issued a bond that gives the holder the option to cash in the principal as either USD 10,000 or CAD 12,500. This asset can be viewed as a USD 10,000 bond plus a call option on CAD 12.500 at a strike price of 0.80 USD per CAD. Can the bond also be viewed as a CAD bond plus an option? Explain. Explain how the two equivalent views are just an application of call-put parity. The strike price stated as the USD price of the CAD is a natural way of quoting a rate for a U.S. Investor. But buying CAD 12,500 at USD/CAD 0.80 is the same as selling USD 10,000 at a CAD/USD rate of 1.25. This way of expressing the transaction make more sense to an investor from the Great White North. Restate the conditions of the bonds using this CAD/USD strike price and give two possible interpretations of the option from a Dominion dweller’s point of view.

Medecins sans Frontieres has issued a bond that gives the holder the option to cash in the principal as either USD 10,000 or CAD 12,500. This asset can be viewed as a USD 10,000 bond plus a call option on CAD 12.500 at a strike price of 0.80 USD per CAD. Can the bond also be viewed as a CAD bond plus an option? Explain. Explain how the two equivalent views are just an application of call-put parity. The strike price stated as the USD price of the CAD is a natural way of quoting a rate for a U.S. Investor. But buying CAD 12,500 at USD/CAD 0.80 is the same as selling USD 10,000 at a CAD/USD rate of 1.25. This way of expressing the transaction make more sense to an investor from the Great White North. Restate the conditions of the bonds using this CAD/USD strike price and give two possible interpretations of the option from a Dominion dweller’s point of view.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 9P

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