Question

Question: The premium on a call Australian dollar option increases when:

a. The Australian dollar is not expected to fluctuate much (against the US$

b. The exercise rate increases from 6.5 (Australian dollars per US dollar) to 7.5

c. The exercise price decreases from 6.5 to 5.5

d. The US President insults the Australian Prime Minister

Question: The premium on a call Australian dollar option decreases when:

a. The Australian dollar is expected to fluctuate wildly (against the US$)

b. The maturity of the option decreases

c. Kangaroos invade Sydney

d. The exercise price increases from 6.5 (Australian dollars to US dollar) to 7.5

e. The price of the option increases

Answer 1

Value of Call option = Spot - Excersise+ Time remaing to maturity

Now if Spot price of AUD appreciates , it's call option premium will increase, whereas if excersise price depriciate call option premium will increase.

Now, we know that 1USD= 6.5 AUD

Thus, if excersise price of 1USD increases to 7.5 AUD, this means USD appreciated whereas AUD depriciated. Hence , value of call option will increase. Option(b).

2. Similarly, if maturity of option reduces..considering the above equation, thus option premium will reduce . Hence, option (b)