Question

The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer the choice of paying a £10,000 bill due in 90 days with either £10,000 or €12,500. Select one:

a. The seller has given the buyer an at-the-money call option on euro with a strike in pounds.

b. The seller has given the buyer an at-the-money put option on pounds with a strike in euro.

c. The seller has given the buyer an at-the-money put option on euro with a strike in pounds.

d. none of the options

Answer 1

In this case, the seller has given the buyer both the option of at the money call option and at the same time he has also provided with at the money put option.

The seller has given the buyer at the money put option on Euro with the strike price in pound

Correct answer is option (C) the seller has given the buyer an at the money put option on Euro with the strike price in pound