8. The Merton model in exercise 7 can also be used to price options on currencies. Suppose for example, we are pricing a call option to buy 10,000 for a rate of $1.10 per in 3 months. Suppose that the U.S.

interest rate is 5.5 percent and that the Euro interest rate is 3.8 percent. The following spreadsheet illustrates how to use the Merton model to price this option (note the low volatility—typical of currencies).

Use this model to perform a sensitivity analysis that shows the effects of the current exchange rate on the option price.