A Company Is Deciding Whether to Issue a One-Year Dual-Currency $\bullet$

question 19

Essay

A company is deciding whether to issue a one-year dual-currency bond or a one-year currency option bond.
$\bullet$ The dual-currency bond would be issued in CHF (Swiss francs) with a principal of 100 CHF per bond, with interest payable in CHF and principal repaid in U.S. dollars ($50). Denote x the interest at which this bond is issued.
$\bullet$ The currency option bond is issued in CHF (100 CHF), and the interest and principal are repaid in CHF or $ at the option of the bondholder. The principal repaid is either 100 CHF or $50, and the interest rate is either y CHF or 1/2y dollars.
As you guessed, the current spot exchange rate is 2 CHF/$. The current one-year market interest rates are 6% in CHF and 10% in $. One-year currency options are quoted in Chicago. A put CHF is quoted at 1.2 U.S. cents per CHF; this option premium is for one CHF, with a strike price of 50 U.S. cents.
a. What is the fair interest rate x on the dual-currency bond?
b. What is the fair interest rate y on the currency option bond?

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Definitions:

Cognitive-Behavioural Therapy

A form of psychotherapy that treats problems by modifying dysfunctional emotions, behaviors, and thoughts.

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Humanistic pertains to an approach or philosophy that emphasizes the value and agency of human beings, individually and collectively, focusing on their needs and experiences.

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Relating to or based on the theories of Sigmund Freud, especially those concerning the unconscious mind, psychosexual development, and defense mechanisms.