Assume that a EURO Call option trades at $0.05. The strike price of the option i

Question

Assume that a EURO Call option trades at $0.05. The strike price of the option is $0.9200 and the current spot rate is $0.9203. A Euro forward contract that expires at the same time with the option is at $0.9195. Use this information to determine which one of the following is not a correct statement.

Time value of the option is $0.0497

US dollar interest rate is lower than Euro interest rate

Intrinsic value of the option is $0.03

The call option price is expected to increase if USD interest rate increases

Time value of the option is $0.0497

US dollar interest rate is lower than Euro interest rate

Intrinsic value of the option is $0.03

The call option price is expected to increase if USD interest rate increases

Explanation / Answer

Intrinsic value of the option is $0.03

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