Consider the graph of a call option shown at right.The option is a three-month American call option on €62,500 with a strike price of $1.50 = €1.00 and an option premium of $3,125.What are the values of A,B,and C,respectively?
A)A = -$3,125 (or -$.05 depending on your scale); B = $1.50; C = $1.55
B)A = -€3,750 (or -€.06 depending on your scale); B = $1.50; C = $1.55
C)A = -$.05; B = $1.55; C = $1.60
D)none of the above

Question

Consider the graph of a call option shown at right.The option is a three-month American call option on €62,500 with a strike price of $1.50 = €1.00 and an option premium of $3,125.What are the values of A,B,and C,respectively? 
A)A = -$3,125 (or -$.05 depending on your scale); B = $1.50; C = $1.55 
B)A = -€3,750 (or -€.06 depending on your scale); B = $1.50; C = $1.55 
C)A = -$.05; B = $1.55; C = $1.60 
D)none of the above

Quizplus · Accepted Answer

- A is the option premium, which is -$3,125 or -$0.05 depending on the scale used. This represents the cost of buying the option.
- B is the strike price, which is $1.50.
- C is the break-even price, which is the sum of the strike price and the option premium, divided by the exchange rate. In this case:
   C = ($1.50 + (-$3,125))/€62,500 = €1.55

Consider the Graph of a Call Option Shown at Right