Homework:Chapter 7 Futures and OptionsHomeWorkA

Question 9, Problem 7-12 (algorithmic)

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Part 1

U.S. Dollar/Euro.The table,

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, indicates that a 1-year call option on euros at a strike rate of

$1.2502/ will cost the buyer $0.0464/, or 3.72%. But that assumed volatility of 10.500% when the spot rate was $1.2487/.

What would the same call option cost if the volatility was reduced to 10.500%

when the spot rate fell to $1.2476/?

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Part 1

The same call option cost if the volatility was reduced to 10.500% when the spot rate fell to $1.2476/

would be $enter your response here/.

(Round to four decimal places.) Help me solve thisView an example

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Data table

Pricing Currency Options on the Euro
	A U.S.-based firm wishing to buy					A European firm wishing to buy
	or sell euros (the foreign currency)					or sell dollars (the foreign currency)
	Variable	Value				Variable	Value
Spot rate (domestic/foreign)	S0	$	1.2487			S0		0.8008
Forward rate (domestic/foreign)	F0	$	1.2395			F0		0.8067
Strike rate (domestic/foreign)	X	$	1.2502			X		0.7999
Domestic interest rate (% p.a.)	rd		1.451	%		rd		2.189	%
Foreign interest rate (% p.a.)	rf		2.189	%		rf		1.451	%
Time (years, 365 days)	T		1.000			T		1.000
Days equivalent			365.00					365.00
Volatility (% p.a.)	s		10.500	%		s		10.500	%
	d1		-0.0294			d1		0.1331
	d2		-0.1344			d2		0.0281
	N(d1)		0.4883			N(d1)		0.5529
	N(d2)		0.4465			N(d2)		0.5112
Call option premium (per unit fc)	c	$	0.0464			c		0.0363
Put option premium (per unit fc)	p	$	0.0568			p		0.0297
(European pricing)
Call option premium (%)	c		3.72	%		c		4.53	%
Put option premium (%)	p		4.55	%		p		3.71	%

U.S. Dollar/Euro.The table indicates that a 1-year call option on euros at a strike rate of $1.2502/ will cost the buyer $0.0464/, or 3.72%.

But that assumed volatility of 10.500%when the spot rate was $1.2487/.

What would the same call option cost if the volatility was reduced to 10.500% when the spot rate fell to $1.2476/?

Question content area bottom

Part 1

The same call option cost if the volatility was reduced to 10.500% when the spot rate fell to $1.2476/ would be

$enter your response here/.

(Round to four decimal places.)

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