Financial Risk Manager Part 1

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Answer: Option A

The solution calculates the price of a currency option using the Black-Scholes model adapted for foreign exchange options. The foreign risk-free rate (3%) replaces the dividend yield in the standard model. The calculation shows: - d₁ = 0.0373 - d₂ = -0.2627 - N(d₁) = 0.5149 - N(d₂) = 0.3964 The call option price is calculated as: $$c = S_0e^{-r_fT}N(d_1) - Ke^{-r_dT}N(d_2)$$ $$c = 1.34e^{-0.03} \times 0.5149 - 1.40e^{-0.04} \times 0.3964 = \$0.1364$$

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Answer: Option A

Author: LeetQuiz Editorial Team

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Q-41. Solution: A
$d_1 = \frac{\ln(1.34/1.40) + \left(4\% - 3\% + \frac{30\%^2}{2}\right) \times 1}{30\%\sqrt{1}} = 0.0373$ $d_2 = d_1 - 30\%\sqrt{1} = -0.2627$ $N(d_1) = 0.5149 \quad \text{and} \quad N(d_2) = 0.3964$
The foreign risk-free rate replaces the dividend yield, such that:
$c = 1.34e^{-3\%}N(d_1) - 1.40e^{-4\%}N(d_2) = \`$0.13`64$

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