alleryStart learning →The Garman-Kohlhagen formula needs two interest rates because
Aeach currency earns its own interest
Btwo banks are always involved
Ctwo strike prices are quoted
Dtax rules differ each year
Answer & Solution
Correct answer: A. each currency earns its own interest
It uses a domestic risk-free rate and a foreign currency risk-free rate to expiry.
Keep practising Foreign Exchange Exposure and Risk Management
Browse all Foreign Exchange Exposure and Risk Management questions for CA Final, or explore more Strategicfinancialmanagement topics.
Related questions
European banks may use their own VaR models to setUnder the Bretton Woods system, many businessesA shift in exchange rates that changes demand for a good sold abroad is an example ofEconomic risk of foreign investment includes exchange rates, regulation andFutures cannot fully mitigate currency risk as they exist only forForward and futures contracts are similar in that bothThe value of a European FX option is typically computed assuming the exchange rate followsThe Garman-Kohlhagen FX option model extends