Question

The current spot exchange rate is $1.55 = €1.00; the three-month U.S. dollar interest rate is 2 percent. Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00. What is the least that this option should sell for?

Answer 1

The least that this option should sell for is $3,125.

Step-by-step explanation:

Acording to the data, we have the following:

The current spot exchange is $1.55=€1.00

The call option has a strike price of $1.50=€1.00 and spot price is €62,500

Hence,to calculate the least value this option should sell for we have to calculate the following:

$1.55-$1.50=$0.05

Hence, $0.05*62,500= $3,125.