Question

The current spot exchange rate is $1.15 /Euro  and the three-month forward rate is $1.30/Euro. Consider a three-month American call option on €62,500 with a premium of $0.25 per Euro.

For this option to be considered out- of-money, the strike price can be_____________.

		$1.25
		$1.50
		$1.00
		$1.15

Answer 1

A call option will always be reflecting the right of buying a share and a call buyer will always want the value of the asset to appreciate so in this case call option, if it has to be in the money, the current market price has to be in line with the exchange rate or exchange rate has to be lower than the current market price or between the current market price and forward rate.

$1.50 is beyond the Forward rate and the Spot Exchange rate so this option is out of the money call option because the strike price is higher than both the spot price and the forward price.

Rest of the options are in the money, or at the money option.

Correct answer would be option ( B) $ 1.50