The current spot exchange rate is $1.55 = €1.00; the three-month U.S.dollar interest rate is 2 percent.Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00.What is the least that this option should sell for?
A)$0.05 × 62,500 = $3,125
B)$3,125/1.02 = $3,063.73
C)$0.00
D)none of the options

Question

Quizplus · Accepted Answer

The intrinsic value of the option is the difference between the spot rate and the strike rate, which is $0.05. Therefore, the minimum value of the option is $0.05 × 62,500 = $3,125.

The Current Spot Exchange Rate Is $1