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Estimate the minimum 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 put 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.

Answer

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

    ≥ Max[ -2, -1.47, 0] = 0 cents

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