Suppose a Foreign Exchange call option is available on the Euro (€) with a strike price of $1.138. The exchange rate between the € and the $ is currently $1.1396. The option expires in 4 months or 0.333 years. The risk-free interest rate is 1.0% and the standard deviation is computed as 0.05 or 5%. Using the Black-Scholes Option Pricing Model, determine the value for d1 and d2 and determine the price (Vc) that you should pay for the call option per €. Suppose the call option for € calls for the delivery of €25,000 per contract. Determine the premium for 1 contract. What is the intrinsic value of this option per unit of currency? You must show all calculations on this problem. d1 = d2 = Vc = Premium (1 contract for €25,000) = Intrinsic Value=

Suppose a Foreign Exchange call option is available on the Euro (€) with a strike price of $1.138. The exchange rate between the € and the $ is currently $1.1396. The option expires in 4 months or 0.333 years. The risk-free interest rate is 1.0% and the standard deviation is computed as 0.05 or 5%. Using the Black-Scholes Option Pricing Model, determine the value for d1 and d2 and determine the price (Vc) that you should pay for the call option per €. Suppose the call option for € calls for the delivery of €25,000 per contract. Determine the premium for 1 contract. What is the intrinsic value of this option per unit of currency? You must show all calculations on this problem. d1 = d2 = Vc = Premium (1 contract for €25,000) = Intrinsic Value=

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 4ST

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