curreny options and using black sholes method?
January 16th, 2011
Consider the prices of currency options on the "zing" (the currency of Zembla). Zemblan interest rates are at 2% while US riskfree rates are 1%. The zing trades at 10 zing/$ today; its volatility is 20%. What is the cost of an ATM straddle, expiring in 3 months, as implied by B-S-M model? Would the cost be more or less, for an ATM straddle expiring in 6 months? If the zing suddenly became more volatile?
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