Consider a two year call on $10,000,000. The strike rate of the call is 105 Yen/$. This call gives you the option to pay Yen 1,050,000,000 and receive $10,000,000 exactly two years from today. Today's spot rate is 100 Yen/$. The two year Yen interest rate is 0.5%. The two year US$ interest rate is 2%. Use the spreadsheet option calculator to answer c, d and e. All interest rates are quoted on an annual basis.
a. What is the intrinsic value of the offered call?
b. What is the breakeven exchange rate on this call option if the premium is 20,000,000 Yen?
c. What is the price of the option if the volatility is 10%?
d. What is the price of the option if the volatility is 20%?
e. What is the implied volatility of the call if it is offered at a price of $500,000?