Problem:
Consider a two year call on $10,000,000. The strike rate of the call is 105 Yen/$. This call gives you the option to pay Yen 1,050,000,000 and receive $10,000,000 exactly two years from today. Today's spot rate is 100 Yen/$. The two year Yen interest rate is 0.5%. The two year US$ interest rate is 2%. Use the spreadsheet option calculator to answer c, d and e. All interest rates are quoted on an annual basis.
Requirement:
Question 1: What is the intrinsic value of the offered call?
Question 2: What is the breakeven exchange rate on this call option if the premium is 20,000,000 Yen?
Question 3: What is the price of the option if the volatility is 10%?
Question 4: What is the price of the option if the volatility is 20%?
Question 5: What is the implied volatility of the call if it is offered at a price of $500,000?
Note: Show all workings.