The current spot exchange rate is $1.55 = €1.00; the three-month U.S. dollar interest rate is 2%. 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 above

Question

Quizplus · Accepted Answer

The least that this option should sell for is its intrinsic value, which is the difference between the spot exchange rate and the strike price multiplied by the number of euros covered by the option. In this case, the intrinsic value is (1.55 - 1.50) * 62,500 = $3,125.

The Current Spot Exchange Rate Is $1