For a $1.50/£ call option with an initial premium of $0.033/£ and a phi value of -0.2, after an increase in the foreign interest (the pound sterling rate) rate from 8% to 9% - the new option premium would be:
A) $0.035/£.
B) $1.48/£.
C) $0.031/£.
D) $0.032/£.

Question

Quizplus · Accepted Answer

The phi value indicates the sensitivity of the option's price to changes in the foreign interest rate. A phi of -0.2 means that for a 1% increase in the interest rate, the option premium decreases by 0.2%. With a 1% increase in the interest rate, the premium decreases by 0.2% of $0.033/£, resulting in a new premium of approximately $0.031/£.

For a $150/£ Call Option with an Initial Premium of $0