Question

Consider a six-month call option written on €100,000 with a strike price of $1.00 = €1.00. The current exchange rate is $1.25 = €1.00; The U.S. risk-free rate is 5% over the period and the euro-zone risk-free rate is 4%. Assume that N(d₁)=0.9989, and N(d₂)=0.9985. What is the option value using the Black-Scholes model?

The answer is $25005

How do i get that?

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

FULL FORMULA IS EXPLAINED

- 2x Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select BO BP BQ 5 K= 231 DERIVATIVES BINOMIAL - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri -11AA = = = Dr Wrap Text General Ea Copy Paste BI U DA E E Format Painter Merge & Center - $ % 8 ... Conditional Format Cell Insert Delete Format Formatting as Table Styles Clipboard Font Alignment Number Styles Cells BN245 for BD BE BE BG BH BL BJ B K BL BM BN 229 XO = 1.25 230 rf = 0.04 EURO RATE 232 0.05 US RATE 233 234 235 Nd1) = 0.9989 e^(-0.05*0.5) = 0.97531 236 N(02) = 0.9985 e^(-0.04*0.5) = 0.98020 237 238 VALUE OF CALL OPTION = 239 240 VALUE OF CALL OPTION = 1.25 *e^(-0.04*0.5)*(0.9989) 1*e^(-0.05*0.5)*(0.9985) 242 VALUE OF CALL OPTION = 1.223901 0.97385 243 VALUE OF CALL OPTION = 0.25005 244 AS CONTRACT VALUE = 100000 EUROS 246 ANSWER VALUE OF CALL OPTION OF CONTRACT = 25005 (100000 X 0.25005] 247 C = Ho é F. N(d) - Kiê N(d2) 241 245 BULL SPREAD BINOMIAL BS Sheet2 RISK NEUTRAL Sheet3 Sheet1 BOND CURRENCY ferences Rea BOI 130% 0 + .HEKA * ENG ..lll 1914 29-10-2019