Suppose that the spot price of the Canadian dollar is U.S. $.75 and that the exchange rate has a variance of 6% per year. The risk free rates are 5% and 2% per year, compounded continuously in Canada and the U.S., respectively.
a) Calculate the value of a European call option with an exercise price of $.70 that expires in 1 year.
b) Calculate the value of a European put option with the same exercise price and expiration date.