Why does a change in the domestic interest rate affect the pricing of a foreign currency option? Does a change in the foreign interest rate cause any change in option prices?
What will be an ideal response?
Changes in either the domestic interest rate or the foreign interest rate change foreign currency option prices. An increase in the domestic interest rate increases the cost of borrowing the domestic currency in the portfolio of borrowing and lending that replicates the option. This increases the price of a call option. Similarly, an increase in the foreign interest rate increase the return from lending the foreign currency and decreases the amount of foreign currency that must be invested in the replicating portfolio, which decreases the cost of a call option.
You might also like to view...
Wendy works as a weather announcer for a TV station under the character name Weather Wendy. Wendy can register her name as
A. none of the choices. B. a trade secret. C. a service mark. D. a trade name.
Some bonds mature in installments. If a bond issue contains this feature, the bonds are known as:
A. serial bonds. B. callable bonds. C. convertible bonds. D. secured bonds.
In impression management, ________ is designed to project an impression of you as a nice, thoughtful, or friendly person.
A. ingratiation B. consultation C. inspiration D. pressure
The primary mechanism used in implementing denial-of-service attacks is the:
A. worm B. Trojan horse C. bot D. all of the above