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# Thread: Using Black-Scholes Formula for currency option

1. ## Using Black-Scholes Formula for currency option

Assumptions:
Risk free rate for pounds = 4%
Risk free rate for dollars = 6%
Spot exchange rate = 0.65 pounds / dollar
Strike = 0.64 pounds / dollar
volatility = 0.1

Calculating the price in pounds of a pound denominated put option on dollars, where the domestic risk free rate is 4% and the foreign risk free rate is 6%, I am getting a price different than what I thought would be the equivalent call.

For this call, I calculated the price in dollars of a dollar denominated call option on pounds and then multiplied the resulting price by 0.65. I used 6% as the domestic risk free rate and 4% as the foreign risk free rate.

What is the proper treatment to get the equivalent dollar denominated call on pounds?

Thank you.

2. did you try flipping .65 pounds/dollar to 1.53846 dollars/pounds and using that as your exchange rate?

3. Yes, I did.

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