For European currency options written on euro with a strike price in dollars,what is the effect of an increase in r_$ relative to r_€? A)Decrease the value of calls and puts ceteris paribus B)Increase the value of calls and puts ceteris paribus C)Decrease the value of calls,increase the value of puts ceteris paribus D)Increase the value of calls,decrease the value of puts ceteris paribus

Question

Quizplus · Accepted Answer

An increase in the US interest rate (r$) relative to the Euro interest rate (r€) makes holding dollars more attractive, which in turn increases the value of calls on euros (since you expect the euro to appreciate) and decreases the value of puts (since you expect the euro to depreciate), all else being equal.

For European Currency Options Written on Euro with a Strike