Impact of Expected Volatility on Currency Option Premiums 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 $0.89 on this day, and was not affected by the announcement. Likewise, the one-year forward rate of the A$ 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.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 5, Problem 43QA
Textbook Problem

Impact of Expected Volatility on Currency Option Premiums 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 $0.89 on this day, and was not affected by the announcement. Likewise, the one-year forward rate of the A$ 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.

This textbook solution is under construction.

Expert Solution

Want to see the full answer?

Check out a sample textbook solution.

Want to see this answer and more?

Experts are waiting 24/7 to provide step-by-step solutions in as fast as 30 minutes!*

*Response times vary by subject and question complexity. Median response time is 34 minutes and may be longer for new subjects.