The Current Spot Exchange Rate Is $1

question 80

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)$6,125/(1 + i_$)^3/12.
• C)negative profit, so exercise would not occur.
• D)$3,125.

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Definitions:

Annual Coupon

The yearly interest payment made to bondholders, usually expressed as a percentage of the bond's face value.

Required Rate

Required Rate refers to the minimum return investors expect to receive on an investment, which is influenced by the investment's risk profile and market conditions.

Credit Default Swap

A financial derivative that allows an investor to "swap" or offset their credit risk with that of another investor.

Recovery Ratio

A financial metric used to determine the amount of money recovered from an investment or project as compared to the amount invested or spent.