80.2K

Verified Solution

Link Copied!

The table, incidicates that a 1-year call option on euros at a striek rate of $1.2503/E will cost the buyer $0.0484/E, or 3.86%. But that assumed a volatility of 10.500% when the spot rate was $1.2533/E. What would the same call option cost if the volatility was reduced to 10.500% when the spot rate fell to $1.2482/E?

U.S. Dollar Euro. The table, indicates that a 1-year call option on euros at a strike role of $1.2509/ will cost the buyer 50.0484/or 3.86% But that assumed a volatity of 10.500% when the spot rate was $12533/6. What would the same call option cost if the volatility was reduced to 10.500% when the spot rate fell to 51.2482/07 The same call option cost the voldity was reduced to 10.60% when the spot rate ted to $1.2462% would be $CM 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 SO Variable SO FO FO rd Spot rate (domestic foreign) Forward rate domestic/foreign) Strike rate (domestic/foreign) Domestic interest rate (% p.a.) Foreign interest rate (% p.a.) Time (years, 365 days) Days equivalent Volatility (%p.a.) Value $ 1.2533 $ 1.2441 $ 1.2503 1,453 % 2.186 % 1.000 365.00 10.500 % rd Value 0.7979 0.8038 0.7998 2.186 1.453 % 1.000 365.00 10.500 rf T 5 s d1 d2 0.0052 -0.0998 0.5021 0.4603 d1 d2 N(D1) Nd2) 0.1000 -0.0050 0.5398 N(1) N(D2) 0.4980 Call option premium (per unit fc) S 0.0484 c 0.0348 Variable Value Variable Value SO SO FO $ 1.2533 $ 1.2441 $ 1.2503 FO rd 1.453 rd Spot rate (domestic/foreign) Forward rate (domestic/foreign) Strike rate (domestic/foreign) Domestic interest rate (% p.a.) Foreign interest rate (%p.a.) Time (years, 365 days) Days equivalent Volatility (% p.a.) 0.7979 0.8038 0.7998 2.186 1.453 1.000 365.00 10.500 % % rf rf T 2.186 % 1.000 365.00 10.500 % S S % d1 d1 d2 d2 0.0052 -0.0998 0.5021 0.4603 0.1000 -0.0050 0.5398 0.4980 N(1) N(da) N(41) N(D2) Call option premium (per unit fc) Put option premium (per unit fc) (European pricing) $ 0.0484 $ 0.0546 0.0348 0.0309 p P 3.86 % 4.36 % Call option premium (%) Put option premium (%) p 4.36 p 3.87 % 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 SO Variable SO FO FO rd Spot rate (domestic foreign) Forward rate domestic/foreign) Strike rate (domestic/foreign) Domestic interest rate (% p.a.) Foreign interest rate (% p.a.) Time (years, 365 days) Days equivalent Volatility (%p.a.) Value $ 1.2533 $ 1.2441 $ 1.2503 1,453 % 2.186 % 1.000 365.00 10.500 % rd Value 0.7979 0.8038 0.7998 2.186 1.453 % 1.000 365.00 10.500 rf T 5 s d1 d2 0.0052 -0.0998 0.5021 0.4603 d1 d2 N(D1) Nd2) 0.1000 -0.0050 0.5398 N(1) N(D2) 0.4980 Call option premium (per unit fc) S 0.0484 c 0.0348 Variable Value Variable Value SO SO FO $ 1.2533 $ 1.2441 $ 1.2503 FO rd 1.453 rd Spot rate (domestic/foreign) Forward rate (domestic/foreign) Strike rate (domestic/foreign) Domestic interest rate (% p.a.) Foreign interest rate (%p.a.) Time (years, 365 days) Days equivalent Volatility (% p.a.) 0.7979 0.8038 0.7998 2.186 1.453 1.000 365.00 10.500 % % rf rf T 2.186 % 1.000 365.00 10.500 % S S % d1 d1 d2 d2 0.0052 -0.0998 0.5021 0.4603 0.1000 -0.0050 0.5398 0.4980 N(1) N(da) N(41) N(D2) Call option premium (per unit fc) Put option premium (per unit fc) (European pricing) $ 0.0484 $ 0.0546 0.0348 0.0309 p P 3.86 % 4.36 % Call option premium (%) Put option premium (%) p 4.36 p 3.87 %

Answer & Explanation Solved by verified expert

See Answer