(Answered) Question an excel workbook entitled fx option pricing is

Management Studies

Question: An Excel workbook entitled FX Option Pricing is downloadable from this book's Web site. The workbook has five spreadsheets constructed for pricing currency options for the following five currency pairs (dollar/euro shown here): U.S. dollar/euro, U.S. dollar/Japanese yen, euro/Japanese yen, U.S. dollar/British pound, and euro/British pound.

U.S. Dollar/Euro. The table above indicates that a 1-year call option on euros at a strike rate of $1.25/€ will cost the buyer $0.0632/€, or 4.99%. But that assumed a volatility of 12.000% when the spot rate was $1.2674/€. What would that same call option cost if the volatility was reduced to 10.500% when the spot rate fell to $1.2480/€?

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