The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00.Consider a three-month American call option on €62,500.For this option to be considered at-the-money,the strike price must be
A)$1.60 = €1.00.
B)$1.55 = €1.00.
C)$1.55 × $\left( 1 + i _{\$} \right) ^ { 3 / 12 }$ = €1.00 × $\left( 1 + i _ { € } \right) ^ { 3 / 12 }$ .
D)none of the options

Question

Quizplus · Accepted Answer

For an option to be considered at-the-money, the strike price should be equal to the current spot exchange rate. So, the strike price in this case should be $1.55 = €1.00. Option A is out of the money as the forward rate is higher than the spot rate, and option C involves calculating the interest rates for both currencies. Therefore, the best choice is B.

The Current Spot Exchange Rate Is $1 (1+i$)3/12\left( 1 + i _{\$} \right) ^ { 3 / 12 }(1+i$​)3/12

The Current Spot Exchange Rate Is $1 $\left( 1 + i _{\$} \right) ^ { 3 / 12 }$