Which of the Following Is True of Call and Put

question 18

Multiple Choice

Which of the following is true of call and put currency options?

• A)If the domestic interest rate is greater than the foreign interest rate,the American option to buy domestic currency in exchange for foreign currency should sell for a price less than that of the European option to do the same.
• B)If the domestic interest rate is greater than the foreign interest rate,the American option to buy domestic currency in exchange for foreign currency should sell for a price greater than that of the European option to do the same.
• C)If the domestic interest rate is greater than the foreign interest rate,the American option to buy domestic currency in exchange for foreign currency should sell for the same price as the European option to do the same.
• D)If the domestic interest rate is same as the foreign interest rate,the American option to buy domestic currency in exchange for foreign currency should sell for the same price as the European option to do the same.

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Definitions:

Market Value

The ongoing price for buying or selling a service or asset on the open market.

Equilibrium

Equilibrium refers to a state in which market supply and demand balance each other, and as a result, prices become stable.

Call Option

A financial contract that gives the holder the right, but not the obligation, to buy a stock, bond, commodity, or other asset at a specific price within a specified time frame.

Strike Price

The specified price at which the holder of an option can buy (in the case of a call option) or sell (in the case of a put option) the underlying asset.