The premium on a call option is primarily a function of the difference in spot price S relative to the strike price X, the length of time until expiration 7, and the volatility of the currency o. C = f(S-X, T, o) For each characteristic of a call option, use the table to indicate whether that would lead to a higher call option premium or a low call option premium (all else equal). Characteristic A lower spot price relative to the strike price A shorter time before expiration A higher level of volatility for the currency Higher Call Option Premium Lower Call Option Premium When using a call option to hedge payables in an international currency, a U.S. based MNC can lock in the to obtain the needed foreign currency. maximum minimum amount of dollars needed
The premium on a call option is primarily a function of the difference in spot price S relative to the strike price X, the length of time until expiration 7, and the volatility of the currency o. C = f(S-X, T, o) For each characteristic of a call option, use the table to indicate whether that would lead to a higher call option premium or a low call option premium (all else equal). Characteristic A lower spot price relative to the strike price A shorter time before expiration A higher level of volatility for the currency Higher Call Option Premium Lower Call Option Premium When using a call option to hedge payables in an international currency, a U.S. based MNC can lock in the to obtain the needed foreign currency. maximum minimum amount of dollars needed
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:The premium on a call option is primarily a function of the difference in spot price S relative to the strike price X, the length of time until expiration T,
and the volatility of the currency o.
C = f(S-X, T, o)
For each characteristic of a call option, use the table to indicate whether that would lead to a higher call option premium or a low call option premium
(all else equal).
Characteristic
A lower spot price relative to the strike price
A shorter time before expiration
A higher level of volatility for the currency
Higher Call Option Premium
O
Lower Call Option Premium
When using a call option to hedge payables in an international currency, a U.S. based MNC can lock in the
to obtain the needed foreign currency.
maximum
minimum
amount of dollars needed
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