Use the Binomial Option Pricing Model to Find the Value

question 26

Multiple Choice

Use the binomial option pricing model to find the value of a call option on £10,000 with a strike price of €12,500.The current exchange rate is €1.50/£1.00 and in the next period the exchange rate can increase to €2.40/£ or decrease to €0.9375/€1.00 .The current interest rates are i_€ = 3% and are i_£ = 4%.Choose the answer closest to yours.

• A)€3,275
• B)€2,500
• C)€3,373
• D)€3,243

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