(a) Assume that the dollar-euro spot rate is $1.28 and the six-month forward rate is Fr=Siers-n:)=$1.28.01 x 5=$1.2864. The six- month U.S. dollar rate is 5 percent and the Eurodollar rate is 4 percent. What is the minimum price that a six-month American call option with a striking price of $1.25 should sell for in a rational market? (b) Use the binomial option pricing model to find the value of a call option on 10,000 with a strike price of 12,500. The current exchange rate is 1.50/1.00 and in the next period the exchange rate can increase to 2.40/ or decrease to 0.9375/1.00 (i.e. U = 1.6 and d = 1/u= 0.625). The current interest rates are i = 38 and are ia (a) Assume that the dollar-euro spot rate is $1.28 and the six-month forward rate is Fr=Siers-n:)=$1.28.01 x 5=$1.2864. The six- month U.S. dollar rate is 5 percent and the Eurodollar rate is 4 percent. What is the minimum price that a six-month American call option with a striking price of $1.25 should sell for in a rational market? (b) Use the binomial option pricing model to find the value of a call option on 10,000 with a strike price of 12,500. The current exchange rate is 1.50/1.00 and in the next period the exchange rate can increase to 2.40/ or decrease to 0.9375/1.00 (i.e. U = 1.6 and d = 1/u= 0.625). The current interest rates are i = 38 and are ia