Suppose the Current Exchange Rate Is $1

question 41

Multiple Choice

Suppose the current exchange rate is $1.62/£,the interest rate in the united states is 5.25%,the interest rate in the United Kingdom is 4%,and the volatility of the $/£ exchange rate is 18%.Using the Black-Scholes formula,the price of a six-month European call option on the British pound with a strike price of $1.60/£ will be closest to:

• A)$0.040/£
• B)$0.059/£
• C)$0.078/£
• D)$0.097/£

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Definitions:

Rate of Return

The increase or decrease in the value of an investment throughout a certain timeframe, represented as a portion of the investment's initial cost.

Risk Premium

The risk premium is the extra return above the risk-free rate that investors demand as compensation for the risk of investing in a particular asset.

Portfolio Beta

A measure of the volatility, or systematic risk, of a portfolio of assets in comparison to the market as a whole.

Unsystematic Risk

Risk associated with a specific company or industry, which can be mitigated through diversification.