Compute the price of call option using the merton formula

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Reference no: EM131458152

Qusetion: A European call on euro matures after T = 6 months. The call pays on the maturity 100[S(T) - 1.30] dollars if it ends in-the-money, and zero is otherwise, where 100 is the contract multiplier and $1.30 is the strike price K. Euro's volatility σ is 12 percent per year. Today's spot exchange rate is $1.4 per euro (in American terms). The continuously compounded annual riskfree interest rates are r = 5 percent in the United States (domestic) and = 4.5 percent in the Eurozone. Compute the price of the call option using the Merton formula.

Reference no: EM131458152

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