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:

Mental Set

A cognitive bias that involves approaching a problem in a particular way, often one that has been successful in the past, which may block or delay the identification of alternative solutions.

Patterns

Regular and predictable forms, orders, or arrangements that can be observed in various contexts, such as behavior, nature, or mathematics.

Reflective Judgment

The process of reasoning through complex issues with uncertainty and synthesizing evidence and opinion to form a justified conclusion.

Critical Thinking

The analysis and evaluation of an issue in order to form a judgment.