As of 10:00 a. m., the premium on a spe-

cific one-year call option on British pounds is $.04.

Assume that the Bank of England had not been inter-

vening in the foreign exchange markets in the last

several months. However, it announces at 10:01 a.m.

that it will begin to frequently intervene in the foreign

exchange market in order to reduce fluctuations in the

pound's value against the U.S. dollar over the next year,

but it will not attempt to push the pound's value higher

or lower than what is dictated by market forces. Also,

the Bank of England has no plans to affect economic

conditions with this intervention. Most participants

who trade currency options did not anticipate this

announcement. When they heard the announcement,

they expected that the intervention would be successful

in achieving its goal. Will this announcement cause the

premium on the one-year call option on British pounds

to increase, decrease, or be unaffected? Explain.