For European currency options written on euro with a strike price in dollars,what is the effect of an increase in the exchange rate S($/€)?
A)Decreases the value of calls and puts ceteris paribus
B)Increases the value of calls and puts ceteris paribus
C)Decreases the value of calls,increases the value of puts ceteris paribus
D)Increases the value of calls,decreases the value of puts ceteris paribus

Question

Quizplus · Accepted Answer

An increase in the exchange rate S($/€) means that the value of the dollar has increased relative to the euro. Since the strike price in this case is in dollars, this means that the strike price has become relatively cheaper in terms of euros. As a result, call options become more valuable because they give the holder the right to buy euros at a lower price (the strike price) and sell them at a higher price (the spot price). On the other hand, put options become less valuable because they give the holder the right to sell euros at a higher price (the strike price) and buy them back at a lower price (the spot price). Therefore, the correct answer is D.

For European Currency Options Written on Euro with a Strike