The solution calcultion is 1/strike - 1/spot price for put option, I do not understand why.
Can someone shed some light?
you might want to put which AM exam.
If this is the 2009 Maple leaf question … Contract is 12.5 M JPY.
Strike and Spot are in JPY/CAD.
So you need to do 1/Strike and 1/Spot to calculate the effect in CAD.
and in any case only the long side in an option bears the credit risk.
CPK,
Yes. I’m talking about Maple leaf question. I agree with you. First of all, why we need to find a value for the option?? Isn’t it always the premium, and the long has credit risk?
Thanks.
amount of credit risk at some other time - (other than initialization) needs to be calculated. hence the amount of credit risk – which was the question here.
the question didn’t mention the value of the put at expiration. Shouldn’t we consider the interest rates of CAD and JPY when do the calculation?
no but they asked fo the credit risk value though.
@jonly: where do interest rates play their part in a Put Option valuation
and @derswap: that is exactly what the calculation is doing …
potential credit risk is borne by holder of option in that the option writer does not perform once option comes due if in the money. This question asked for the amount in which case you need to take difference between spot and exercise.