Question: Question 1 (9 marks) Part A: (5 marks) Consider the option on currency CNY against the USD: Current spot rate is CNY 6.50 for 1

Question 1 (9 marks) 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 (o) 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. I (1) How much does it cost to hold (i.e., buy) a call-CNY option? Use the Garman Kohlhagen model. [2 marks] How much does it cost to hold (i.e., buy) a put-CNY option? Do not use the Garman Kohlhagen model [2 marks) What is the maximum profit that the holder of the put-CNY option can realize on terminal date? [1 mark]

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