The 6-month call and put premiums are $0.114 and $0.098,respectively,with a $0.94 strike.Dollar and euro interest rates are 7.0% and 6.0%,respectively.What spot exchange rate is implied by this data?
A) $0.98 dollars per euro
B) $1.02 dollars per euro
C) $1.05 dollars per euro
D) $1.09 dollars per euro

Question

Quizplus · Accepted Answer

To calculate the implied spot exchange rate, we need to use the put-call parity formula:

Spot exchange rate = Strike price + Call premium - Put premium - Present value of interest rate differential

PV of interest rate differential = [(1 + dollar interest rate) / (1 + euro interest rate)]^(time to expiration) - 1

Substituting the given values:
Spot exchange rate = $0.94 + $0.114 - $0.098 - [((1 + 0.07) / (1 + 0.06))^0.5 - 1]
Spot exchange rate = $0.94 + $0.016 - 0.013 - 0.017
Spot exchange rate = $0.926

Therefore, the implied spot exchange rate is $0.926 per euro, which is equivalent to $1.08 dollars per euro. The closest option is B, $1.02 dollars per euro.

The 6-Month Call and Put Premiums Are $0