The table below indicates that a 1-year call option on euros at a strike rate of $1.2497/euro will cost the buyer $0.0497/euro,or 3.96%. But that assumed a volatility of 10.500% when the spot rate was $1.2551/euro. What would the same call option cost if the volatility was reduced to 10.500% when the spot rate fell to $1.2483/euro?.

1 Pricing Currency Options on the Euro 3 A U.S.-based firm wishing to buy or sell euros (the foreign currency) A European-based firm or sell dollars (the wishing to buy foreign currency) Variable SO $ $ $ 1 5 5 7 Spot rate (domestic/foreign) 3 Forward rate (domestic/foreign) Strike rate (domestic/foreign) o Domestic interest rate (% p.a.) 1 Foreign interest rate (% p.a.) 2 Time (years, 365 days) 3 Days equivalent 4 Volatility (% p.a.) 5 6 FO X rd rf IT Value 1.2551 1.2459 1.2497 1.453 % 2.187 % 1 365 10.5% Variable SO FO rd rf Value 0.7967 0.8026 0.8002 2.1871% 1.453 % 1 T 365 s s S 10.51% di 0.0235 0.081 7 -0.0815 di d2 Nd1) N(2) d2 Nd1) N(2) -0.024 0.5323 8 9 9 0.5094 0.4675 0.4904 0 C $ $ 0.0497 0.0534 0.0341 0.0317 p p 1 Call option premium (per unit fc) 2 Put option premium (per unit fc) 3 (European pricing) 4 5 Call option premium (%) 6 Put option premium (%) 3.96% 4.25% 4.28 % 3.98% p p 1 Pricing Currency Options on the Euro 3 A U.S.-based firm wishing to buy or sell euros (the foreign currency) A European-based firm or sell dollars (the wishing to buy foreign currency) Variable SO $ $ $ 1 5 5 7 Spot rate (domestic/foreign) 3 Forward rate (domestic/foreign) Strike rate (domestic/foreign) o Domestic interest rate (% p.a.) 1 Foreign interest rate (% p.a.) 2 Time (years, 365 days) 3 Days equivalent 4 Volatility (% p.a.) 5 6 FO X rd rf IT Value 1.2551 1.2459 1.2497 1.453 % 2.187 % 1 365 10.5% Variable SO FO rd rf Value 0.7967 0.8026 0.8002 2.1871% 1.453 % 1 T 365 s s S 10.51% di 0.0235 0.081 7 -0.0815 di d2 Nd1) N(2) d2 Nd1) N(2) -0.024 0.5323 8 9 9 0.5094 0.4675 0.4904 0 C $ $ 0.0497 0.0534 0.0341 0.0317 p p 1 Call option premium (per unit fc) 2 Put option premium (per unit fc) 3 (European pricing) 4 5 Call option premium (%) 6 Put option premium (%) 3.96% 4.25% 4.28 % 3.98% p p