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Problem 7-12 (algorithmic) Question Help U.S. Dollar/Euro. The table, E., indicates that a 1-year call option on euros at a strike rate of $1.2501 /

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Problem 7-12 (algorithmic) Question Help U.S. Dollar/Euro. The table, E., indicates that a 1-year call option on euros at a strike rate of $1.2501 / will cost the buyer $0.0531/ , or 4.21%. But that assumed a volatility of 10.500% when the spot rate was $1.2624 / . What would the same call option cost if the volatility was reduced to 10.500% when the spot rate fell to $1.2484 / ? The same call option cost if the volatility was reduced to 10.500% when the spot rate fell to $1.24841 would be $/. (Round to four decimal places.) Pricing Currency Options on the Euro A U.S.-based firm wishing to buy or sell euros (the foreign currency) A European firm wishing to buy or sell dollars (the foreign currency) Variable Value Variable Value SO $ 1.2624 SO 0.7921 FO $ 1.2532 FO 0.7979 Spot rate (domestic/foreign) Forward rate (domestic/foreign) Strike rate (domestic/foreign) Domestic interest rate (% p.a.) $ 1.2501 0.7999 rd 1.453 % rd 2.188 % 2.188 % 1.453 % Foreign interest rate (% p.a.) Time (years, 365 days) Days equivalent T 1.000 T 1.000 365.00 365.00 Volatility (% p.a.) S 10.500 % s 10.500 % d1 0.0761 d1 0.0287 d2 -0.0289 d2 -0.0763 0.5303 0.5114 N(D1) N(D2) N(D1) N(D2) 0.4885 0.4696 $ 0.0531 0.0317 Call option premium (per unit fc) Put option premium (per unit fc) (European pricing) $ 0.0501 0.0337 4.21 % 4.00 % Call option premium (%) Put option premium (%) 3.97 % 4.25 %

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