A European at-the-money call option on a currency has four years until maturity. The exchange rate volatility is 10%, the domestic risk-free rate is 2% and the foreign risk-free rate is 5%. The current exchange rate is 1.2000. What is the value of the option?
A) 1.11N(0.7)-0.98N(0.5)
B) 1.11N(-0.7)-0.98N(-0.5)
C) 1.11N(0.7)-0.98N(0.4)
D) 1.11N(-0.06)-0.98N(-0.10)

Question

Quizplus · Accepted Answer

The value of a European call option on a currency is given by the formula: $ C = S_0 e^{-r_f T} N(d_1) - K e^{-r_d T} N(d_2) $. Here, $ d_1 $ and $ d_2 $ are calculated using the Black-Scholes formula. The correct choice reflects the correct calculation of these terms.

A European At-The-Money Call Option on a Currency Has Four