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15 February, 15:09

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?

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  1. 15 February, 15:16
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    The least that this option should sell for is $3,125.

    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.
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