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

question 12

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) 0.98N(0.25)-1.11(0.05)
• B) 0.98N(-0.3)-1.11N(-0.5)
• C) 0.98N(-0.5)-1.11N(-0.7)
• D) 0.98N(0.10)-1.11N(0.06)

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Definitions:

Income

The total amount of money received by a person or company during a certain period, usually from work, investments, or business activities.

Loss

A financial condition where total expenses exceed total revenues, resulting in a negative profit.

Acceptance

The act of receiving or approving something, often used in the context of agreements or contracts.

Differential Cost

The difference in cost between two alternative decisions or scenarios, impacting the selection of one option over another.