Pricing Currency Options on the Euro A U.S.-based firm wishing to buy A European-based 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 $ 1.2554 S0 0.7966 Forward rate (domestic/foreign) F0 $ 1.2462 F0 0.8025 Strike rate (domestic/foreign) X $ 1.2498 X 0.8001 Domestic interest rate (% p.a.) rd 1.452 % rd 2.186 % Foreign interest rate (% p.a.) rf 2.186 % rf 1.452 % Time (years, 365 days) T 1.000 T 1.000 Days equivalent 365.00 365.00 Volatility (% p.a.) s 10.500 % s 10.500 % d1 0.0250 d1 0.0810 d2 -0.0800 d2 -0.0240 N(d1) 0.5100 N(d1) 0.5323 N(d2) 0.4681 N(d2) 0.4904 Call option premium (per unit fc) c $ 0.0498 c 0.0340 Put option premium (per unit fc) p $ 0.0534 p 0.0317 (European pricing) Call option premium (%) c 3.97 % c 4.27 % Put option premium (%) p 4.25 % p 3.98 %

U.S. Dollar-Euro. The table, indicates that a 1-year call option on euros at a strike rate of $1.2498=1.00 will cost the buyer $0.0498 per , or 3.97%. But that assumed a volatility of 10.500% when the spot rate was $1.2554=1.00. What would that same call option cost if the volatility was reduced to 10.500% when the spot rate $1.2475=1.00? The same call option cost if the volatility was reduced to 10.500% when the spot rate fell to $1.2475=1.00 would be $ / . (Round to four decimal places.) U.S. Dollar-Euro. The table, indicates that a 1-year call option on euros at a strike rate of $1.2498=1.00 will cost the buyer $0.0498 per , or 3.97%. But that assumed a volatility of 10.500% when the spot rate was $1.2554=1.00. What would that same call option cost if the volatility was reduced to 10.500% when the spot rate $1.2475=1.00? The same call option cost if the volatility was reduced to 10.500% when the spot rate fell to $1.2475=1.00 would be $ / . (Round to four decimal places.)