Suppose the exchange rate is 123C the Canadian dollardenomin

Suppose the exchange rate is $1.23/C$, the Canadian dollar-denominated continuously compounded interest rate is 8%, the U.S. dollar-denominated continuously compounded interest rate is 5%, and the price of a 1-year $1.25-strike European call on the Canadian dollar is $0.0974. What is the value of a 1-year $1.25-strike European put on the Canadian dollar?

a.

$0.1361

b.

$0.0813

c.

$0.1510

d.

$0.1174

e.

$0.1617

Solution

Using PUT CALL PARITY THEORY ,

C + X / (1+R h)^T = E / ( 1+Rf) ^T + P

Where,

C = Call Premium =  $0.0974

X = Strike Price = $1.25

Rh = Annual Interest Rate of Home Country = 8%

Rh = Annual Interest Rate of Foreign Country = 5%

T = Time in Years = 1

E = Spot Exchange Rate = $ 1.23

P = Put Premium = ?

Substuiting ,

$0.0974 + $1.25 / ( 1+ 8%) = $  1.23 / ( 1+5 %) + P

$ 0.0974 + $ 1.1574 = $ 1.1714 + P

P =$ 0.0974 + $ 1.1574 - $ 1.1714

P = $ 0.0834

So Option B. ( Aprox)