2009 CFAI exam morning session question 9.
Maple Leaf is long 100 JPY put European style options with expiration in 6 months, at strike prices of 100 JPY/CAD and a contract size of JPY12.5 million. Current exchange rage is 102.5 JPY/CAD. Six-monrh interest rate is given at 3% for Canada and 0.5% for Japan. Question asks for the amount at risk from a credit loss on the long JPY put option.
I get that Maple leaf is the party that bears credit risk because it bears the risk that the other party won’t make the payment to buy the option in 6 months.
However, in claculating the amonut, of loss, the solution uses 1/100 -1/102.5 and say “if exchange rates remain unchaged until then”.
My question is why we don’t use the interest rates to calculate the actual future exchange rate in 6 months: 100*1.005^0.5/1.03^0.5?.