1. Currency options are defined as the right to buy or sell currencies at specified prices. Review the modified Black-Scholes option pricing model (also known as the Garman-Kohlhagen-Black-Scholes model) here: Resolution: The Authority on Derivative Pricing. OR click on this link: http://www.derivativepricing.com/blogpage.asp?id=22
A. Discuss the relationships between these variables. In other words, explain the “moneyness” or the relationship between the current spot rate and the strike price. Explain the relationship between the domestic interest rate, the foreign interest rate, the time to maturity, and the volatility. Finally, explain the option value.
B. Comment on the situation in which you would use options over futures as a hedging tool. Do you agree or disagree with your peers’ points of view regarding using options over futures?
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