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 with a strike price of $1.50 = €1.00.Immediate exercise of this option will generate a profit of A)$6,125. B)$6,125/(1 + $\ddot { l } _{\$}$ )^3/12. C)negative profit,so exercise would not occur. D)$3,125.

Question

Quizplus · Accepted Answer

Immediate exercise of the option means buying €62,500 at the strike price of $1.50/€, then selling it at the current spot rate of $1.55/€. The profit per euro is $0.05 ($1.55 - $1.50), so for €62,500, the profit is €62,500 * $0.05 = $3,125.

The Current Spot Exchange Rate Is $1 l¨$\ddot { l } _{\$}l¨$​

The Current Spot Exchange Rate Is $1 $\ddot { l } _{\$}$