Hello,
I trying to evaluate an investment opportunity called a dual current deposit, simply its a normal bank deposit where I would also sell the bank an option to exhance my return. It is straight forward except for the part that the option premium itself can end up being in the foreign currency at the end and thus it becomes a bit recurssive (option on option premuim etc). I made an example of how I think the product can be evaluated, would appreciate it if someone can take a look and confirm the logic. (all numbers are made up)
Bank regular one year deposit rate: 2%
Today (spot): 1 Euro =1.1 USD
Strike(option): 1 Euro=0.9 USD
Fair price for call option on 1 USD at 0.9 euro=0.05 USD (standalone option value)
Initial Investment: 100 USD
If at expiration EUROUSD is less than 0.9 customer I paid in Euro. Else I get paid in USD
Fair payment (USD) if EUROUSD >=0.9:
(solve for unknown)
((100+total option premium)*1.02)*0.05=total option premium
(102+1.02 total option premium)*0.05=total option premium
5.1+0.051 total option premium =total option premium
Total option premium=5.37 USD
Payment at expiration should be
=(100+5.37)*1.02
=107.47 (an option on this amount is worth 107.47 * 0.05=5.37, (5.37+100)*1.02=107.47
Thanks