1-The USD-GBP (Pound Sterling) exchange rate is 1.38. The USD interest rate is 2% per annum, and the GBP interest rate is 1% per annum. According to the Black-Scholes-Merton model, what is the price of a European call option on the exchange rate with a strike price of 1.50 and maturing after 18 months. The volatility of the exchange rate is 20%. The contract multiplier is 100.

2-

Which of the following statements are true about the Black-Scholes-Merton model?

i. The interest rate used in the formula is the continuously compounded rate.

ii. The model can used to price both European and American options.

iii. The model assumes constant volatility of the stock.

a.

i and ii

b.

i and iii

c.

ii and iii

d.

i, ii, and iii are all true

e.

i, ii, and iii are all fals