Suppose That You Observe a European Option on a Currency

question 30

Multiple Choice

Suppose that you observe a European option on a currency with an exchange rate of S₀ and a foreign risk-free rate of . Which of the following inequalities correctly expresses the lower bound of the call?

• A) C_e(S₀,T,X) ≥ Max[0,S₀(1 +  )^-T + X(1 + r)^-T]
• B) C_e(S₀,T,X) ≥ Max[0,S₀ - X(1 +  )^-T]
• C) C_e(S₀,T,X) ≥ Max[0,S₀(1 +  )^-T - X]
• D) C_e(S₀,T,X) ≥ Max[0,S₀(1 +  )^-T - X(1 + r)^-T]
• E) none of the above

---

Definitions:

Dependency

A relationship in which one entity relies on another for support or sustenance.

Taste-For-Discrimination Model

An economic theory that explains how personal bias and preferences can lead to differences in wages and employment opportunities for various groups.

Prejudice

Preconceived opinions or judgments towards people or groups without sufficient knowledge, reason, or direct experience, often leading to discrimination.

Demand Theory

An economic principle that describes how the demand for goods or services changes in response to price changes, assuming all other factors remain constant.