Calculate the minimum price sell for in a rational market, Financial Management

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Suppose spot Swiss franc is $0.7000 and the six-month forward rate is $0.6950. What is the minimum price which a six-month American call option along with a striking price of $0.6800 should sell for in a rational market? Suppose the annualized six-month Eurodollar rate is 3½ percent.

Solution:

C_a ³Max[(70 - 68), (69.50 - 68)/(1.0175), 0]

³Max[ 2, 1.47, 0] = 2 cents

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