Question

Consider a three-month European call option issued on €62,500 with a strike price of $1.35 =...

Consider a three-month European call option issued on €62,500 with a strike price of $1.35 = €1.00 and an option premium of $3,750. What is the break even Spot Exchange Rate in three month ? (Assume interest rate is 0)

A.

$1.60/€
B.

$1.55/€
C.

$1.41/€
D.

none of the above
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Homework Answers

Answer #1

Profit on call option = value of option at the time of maturity - option premium

For break even, profit on call option needs to be zero.

Therefore, for break even price,

Value of option at the time of maturity = option premium

Value of option at the time of maturity = 3750

(Strike price - spot at maturity) x 62500 = 3750

Spot at maturity for break even price = 1.35 + 0.06 = $ 1.41 per €

Option C is correct

Thumbs up please if satisfied. Thanks :)

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