Question

A financial institution has just bought 6-month European call options on the Chinese yuan.
Suppose that the spot exchange rate is 14 cents per yuan, the exercise price is 15 cents per yuan,
the risk-free interest rate in the United States is 2% per annum, the risk-free interest rate in China
is 4% per annum, and the volatility of the yen is 12% per annum. Calculate vega of the financial
institution’s position. Check the accuracy of your vega estimate by valuing the option at a
volatility of 12% and 12.1% sequentially.

Answer 1

Proper solution is provided.