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Assume you are looking at prices from the NASDAQ OMX PHLX and that the price of a

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Assume you are looking at prices from the NASDAQ OMX PHLX and that the price of a three-month European AUD call option with a strike price of 92 cents per Australian dollar is 3.2¢/AUD. Suppose that the spot exchange rate is 90¢/AUD, the continuously compounded annualized dollar interest rate is 2%, and the analogous AUD interest rate is 5%. What is the implied volatility of the continuously compounded annualized rate of appreciation of the AUD relative to the dollar?

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. 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...
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International Financial Management

International Financial Management

ISBN: 978-1107111820

3rd edition

Authors: Geert Bekaert, Robert Hodrick

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A call option is a type of financial contract that gives the holder the right, but not the obligation, to buy an underlying asset (such as a stock, commodity, or currency) at a specified price (called the strike price) within a specified period of time. When an investor purchases a call option, they are essentially betting that the price of the underlying asset will rise above the strike price before the option\'s expiration date. If the price of the asset does rise above the strike price, the investor can exercise the option by buying the asset at the strike price and then selling it at the higher market price, thereby earning a profit. Call options are often used as a speculative investment strategy, as they allow investors to potentially profit from the upward movement of an asset without having to actually own the asset itself. They are also commonly used as a hedging tool to protect against potential losses in a portfolio.

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