Medecins sans Frontieres has issued a bond that gives the holder the option to cash in the principal as either USD 10,000 or CAD 12,500. This asset can be viewed as a USD 10,000 bond plus a call option on CAD 12.500 at a strike price of 0.80 USD per CAD.
Can the bond also be viewed as a CAD bond plus an option? Explain.
Explain how the two equivalent views are just an application of call-put parity.
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The strike price stated as the USD price of the CAD is a natural way of quoting a rate for a U.S. Investor. But buying CAD 12,500 at USD/CAD 0.80 is the same as selling USD 10,000 at a CAD/USD rate of 1.25. This way of expressing the transaction make more sense to an investor from the Great White North. Restate the conditions of the bonds using this CAD/USD strike price and give two possible interpretations of the option from a Dominion dwellerĂ˘â‚¬â„˘s point of view.