An investment banker is considering the issue of a one-year Australian dollar/U.S. dollar currency-option bond. The currency-option

Question:

An investment banker is considering the issue of a one-year Australian dollar/U.S. dollar currency-option bond. The currency-option bond is to be issued in A$ (A$ 1,000), and the interest and principal are to be repaid in AS or US$ at the option of the bondholder. The principal repaid would be either A$ 1,000 or US$549.45. The current spot is A$ 1.82 per US$. The current one-year market interest rates are 8 percent in AS and 5 percent in USS. A one-year put option on the A$. with a of A$ 1.82 per US$, is quoted at 2 U.S. cents; this is an option to sell one A$ for 1/US$1.82.
a. What should be the fair rate set on this currency-option bond, according to market conditions?
b. What is the value of the bond if it is issued at a of 3.4 percent?
Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity. Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...