Compute minimum price with striking price in rational market

Suppose spot Swiss franc is $0.7000 and the six-month forward rate is $0.6950. Estimate the minimum price which a six-month American call option along with a striking price of $0.6800 must sell for in a rational market? Suppose the annualized six-month Eurodollar rate is 3 ½ percent.

Solution:

Ca ≥ Max[(70 - 68), (69.50 - 68)/(1.0175), 0]

≥Max[ 2, 1.47, 0] = 2 cents

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