Consider the graph of a call option shown at right.The option is a three-month American call option on €62,500 with a strike price of $1.50 = €1.00 and an option premium of $3,125.What are the values of A,B,and C,respectively?
A)A = -$3,125 (or -$.05 depending on your scale); B = $1.50; C = $1.55
B)A = -€3,750 (or -€.06 depending on your scale); B = $1.50; C = $1.55
C)A = -$.05; B = $1.55; C = $1.60
D)none of the above

Question

Consider the graph of a call option shown at right.The option is a three-month American call option on €62,500 with a strike price of $1.50 = €1.00 and an option premium of $3,125.What are the values of A,B,and C,respectively? 
A)A = -$3,125 (or -$.05 depending on your scale); B = $1.50; C = $1.55 
B)A = -€3,750 (or -€.06 depending on your scale); B = $1.50; C = $1.55 
C)A = -$.05; B = $1.55; C = $1.60 
D)none of the above

Quizplus · Accepted Answer

A is the option premium, which is -$3,125. B is the strike price, which is $1.50. C is the breakeven price, which can be found by adding the strike price and the option premium and dividing by the exchange rate, so C = ($1.50 - $0.05) / €1.00 = €1.45. However, the answer choices are given in USD rather than EUR, so we convert the breakeven price back to USD: C = €1.45 * $1.50/€1.00 = $2.175, which rounds up to $2.18 or $1.55 above the strike price of $1.50. Therefore, A = -$3,125, B = $1.50, and C = $1.55.

Consider the Graph of a Call Option Shown at Right