The Current Spot Exchange Rate Is $1 $\ddot { l } _{\$}$

question 8

Multiple Choice

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00.Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00.Immediate exercise of this option will generate a profit of

• A)$6,125.
• B)$6,125/(1 + \(\ddot { l } _{\$}\) )^3/12.
• C)negative profit,so exercise would not occur.
• D)$3,125.

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