An American call option on foreign currency

Question

BlackTom AI · Accepted Answer

First, let's restate the core idea of an American call option on foreign currency to ground the analysis: it gives the holder the right, but not the obligation, to buy a specified amount of foreign currency at a predetermined price (the strike) any time before or at expiration.
Option 1: 'Obligates you to buy foreign currency at a known price at any time during the period of the option' is describing an obligation rather than a right. An option contract grants a right to the holder, not an obligation for them to buy; the seller may be obliged, but the holder is not. This makes the option incorrect as stated.
Option 2: 'Gives you the right to buy foreign currency at a known price at a specific day in the future' specifies a single future date. That describes a European option, which can only be exercised on the expiration date, not an American option, which allows exercise at any time up to expiration. Therefore this is not accurate for an American-style contract.
Option 3: 'Gives you the right to sell foreign currency at a known price at any time during the period of the option' describes a put option, which grants the right to sell, not a call option which is about buying. Since the prompt is about a call option, this characterisation mismatches the instrument, making it incorrect.
Option 4: 'Gives you the right to buy foreign currency at a known price at any time during the life of the option' aligns with the standard definition of an American call option on foreign currency: the holder has the flexibility to exercise at any time before expiration to buy the currency at the strike price. This correctly captures both the 'right to buy' and the 'any time during the life' (American style) aspects of the contract, which distinguishes it from European or obligational descriptions.
In summary, the critical distinctions hinge on (a) whether the instrument confers a right vs. an obligation, (b) whether it involves buying vs. selling, and (c) whether exercise can occur at any time or only on a single date. The only option that consistently matches all these features of an American call on foreign currency is the one stating the holder's right to buy at a fixed price at any time during the life of the option.

BUSFIN 4229 SP2025 (4930) FINAL EXAM SP 25- Requires Respondus LockDown Browser

An American call option on foreign currency

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