For a European Call Option on a Currency,the Exchange Rate

question 15

Multiple Choice

For a European call option on a currency,the exchange rate is 1.0000,the strike price is 0.9100,the time to maturity is one year,the domestic risk-free rate is 5% per annum,and the foreign risk-free rate is 3% per annum.How low can the option price be without there being an arbitrage opportunity?

• A) 0.1048
• B) 0.0900
• C) 0.1344
• D) 0.1211

---

Definitions:

Annual Interest Rate

The percentage of a sum of money charged for its use per year.

Double

To increase or become twice as much in size, amount, or number.

Value

The importance, worth, or usefulness of something, often determined by its desirability, utility, or rarity.

Savings

The portion of income not spent on consumption or taxes, often set aside for future use or investment.