Part A: (5 marks)

Consider the option on currency CNY against the USD:

Current spot rate is CNY 6.50 for 1 USD Risk-free CNY rate of interest is 4% p.a. Risk-free USD rate of interest is 2% p.a. Volatility () of the currency returns is 20% p.a. Maturity of the option is 6 months. Strike rate of the option is CNY 7.00 for 1 USD The currency options are European in nature

Answer the following questions.

1. How much does it cost to hold (i.e., buy) a call-CNY option? Use the Garman Kohlhagen model.

[2 marks]

2. How much does it cost to hold (i.e., buy) a put-CNY option? Do not use the Garman Kohlhagen model.

[2 marks]

3. What is the maximum profit that the holder of the put-CNY option can realize on terminal date?

[1 mark]