A European At-The-Money Call Option on a Currency Has Four

question 16

Multiple Choice

A European at-the-money call option on a currency has four years until maturity. The exchange rate volatility is 10%, the domestic risk-free rate is 2% and the foreign risk-free rate is 5%. The current exchange rate is 1.2000. What is the value of the option?

• A) 1.11N(0.7)-0.98N(0.5)
• B) 1.11N(-0.7)-0.98N(-0.5)
• C) 1.11N(0.7)-0.98N(0.4)
• D) 1.11N(-0.06)-0.98N(-0.10)

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Definitions:

Ciliates

A group of protozoans characterized by the presence of hair-like structures called cilia, which they use for movement and feeding.

Hydrogen Bond

Attraction between a covalently bonded hydrogen atom and another atom taking part in a separate polar covalent bond.

Polar Covalent Bond

A type of chemical bond where electrons are unequally shared between atoms, leading to partial electric charges.

Covalently Bonded

Atoms that are linked together by sharing pairs of electrons to achieve stability.