FREE Trial

The price of a 6-month dollar-denominated call option on the euro with a $0.90 strike is $0.0404.

Question:

The price of a 6-month dollar-denominated call option on the euro with a $0.90 strike is $0.0404. The price of an otherwise equivalent put option is $0.0141. The annual continuously compounded dollar interest rate is 5%.
a. What is the 6-month dollar-euro forward price?
b. If the euro-denominated annual continuously compounded interest rate is 3.5%, what is the spot exchange rate?
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Answer rating: 77% (18 reviews)

a We can use putcallparity to determine the forward price C K T P K T PV forward pri...View the full answer


answer-question-section
Answered By
tutor-profile-image
Zablon Gicharu
I am an educator who possesses the requisite skills and knowledge due to interacting with students for an extended period. I provide solutions to various problems in step-by-step explanations, a well-thought approach and an understandable breakdown. My goal is to impart more straightforward methodologies and understanding to students for more remarkable achievements.
5.00+ 4+ Reviews 10+ Question Solved
Related Book For  book-img-for-question
Derivatives Markets

Derivatives Markets

ISBN: 978-0321543080

4th edition

Authors: Rober L. Macdonald

See More Books
Question Posted:
See More Questions

Related Video

A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.

Students also viewed these Banking questions

The Quantum Leap In Speed To Market 2nd Edition - ISBN: 0962818259 - Free Book