Question
Euro/British Pound. How would the call option premium change on the right to buy pounds with euros if the euro interest rate changed to 4.15%
Euro/British Pound. How would the call option premium change on the right to buy pounds with euros if the euro interest rate changed to 4.15% from the initial values listed in this table:
Pricing Currency Options on the Euro | |||||||||
A U.S.-based firm wishing to buy | A European firm wishing to buy | ||||||||
or sell euros (the foreign currency) | or sell dollars (the foreign currency) | ||||||||
Variable | Value | Variable | Value | ||||||
Spot rate (domestic/foreign) | S0 | 1.4730 | S0 | 0.6789 | |||||
Forward rate (domestic/foreign) | F0 | 1.4654 | F0 | 0.6824 | |||||
Strike rate (domestic/foreign) | X | 1.5000 | X | 0.6667 | |||||
Domestic interest rate (% p.a.) | rd | 2.072 | % | rd | 4.160 | % | |||
Foreign interest rate (% p.a.) | rf | 4.160 | % | rf | 2.072 | % | |||
Time (years, 365 days) | T | 0.247 | T | 0.247 | |||||
Days equivalent | 90.00 | 90.00 | |||||||
Volatility (% p.a.) | s | 11.400 | % | s | 11.400 | % | |||
d1 | -0.38 | d1 | 0.44 | ||||||
d2 | -0.44 | d2 | 0.38 | ||||||
N(d1) | 0.35 | N(d1) | 0.67 | ||||||
N(d2) | 0.33 | N(d2) | 0.65 | ||||||
Call option premium (per unit fc) | c | 0.0189 | c | 0.0241 | |||||
Put option premium (per unit fc) | p | 0.0533 | p | 0.0086 | |||||
(European pricing) | |||||||||
Call option premium (%) | c | 1.28 | % | c | 3.55 | % | |||
Put option premium (%) | p | 3.62 | % | p | 1.26 | % |
The call option on British pounds, if the euro interest rate changed to 4.15%, would be [?]/. (Round to four decimal places.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started