Suppose the current exchange rate is $1.62/£,the interest rate in the united states is 5.25%,the interest rate in the United Kingdom is 4%,and the volatility of the $/£ exchange rate is 18%.Using the Black-Scholes formula,the price of a six-month European call option on the British pound with a strike price of $1.60/£ will be closest to:
A)$0.040/£
B)$0.059/£
C)$0.078/£
D)$0.097/£

Question

Quizplus · Accepted Answer

D)F_T = S × 11ea7cce_3c07_74b7_928c_6b9a4e0dafb7_TB1626_11 = 11ea7cce_3c07_74b8_928c_e5336a400755_TB1626_11 = $1.62 × 1.005992 = 11ea7cce_3c07_9bc9_928c_d952aa7a0974_TB1626_11 d₁ = 11ea7cce_3c07_c2da_928c_75b50bf1b0d5_TB1626_11 + 11ea7cce_3c07_e9eb_928c_bb40c25d7000_TB1626_11 = 11ea7cce_3c07_e9ec_928c_454af86a5609_TB1626_11 + 11ea7cce_3c08_10fd_928c_cf6269261c7d_TB1626_11 = 0.208172 or 0.21 d₂ = d₁ - σ 11ea7cce_3c08_10fe_928c_3d94490e07ec_TB1626_11 = .208172 - .18 11ea7cce_3c08_380f_928c_6f4762f72a84_TB1626_11 = .080893 or .08 C = 11ea7cce_3c08_5f20_928c_7f91f64e46de_TB1626_11 N(d₁)- 11ea7cce_3c08_5f21_928c_b7550573bf6a_TB1626_11 N(d₂)= 11ea7cce_3c08_8632_928c_9b0e84359ea1_TB1626_11 (.5832)- 11ea7cce_3c08_ad43_928c_1f417013e270_TB1626_11 (0.5219)= 11ea7cce_3c08_ad44_928c_1f2b008df20d_TB1626_11 where N(.21)= .5832 and N(.08)= .5319 from the cumulative standard normal tables.

Suppose the Current Exchange Rate Is $1