Review Question: Delta & Moneyness
A 3-month EUR call/USD put has a 25% delta. The current EUR/USD 3-month forward rate is 1.2000. Which of the following is true in relation to the strike of the option?
- The strike is above 1.2000
- The strike is below 1.2000
- Information given is insufficient to determine the strike
Answer:
1 Correct. The option is 25% delta. Therefore, it must be OTM. As it is an EUR call option, the OTM strike price allows us to buy fewer euro with dollars than would be the case if we traded in the market at the moment. Currently, we would need to give up 1.2000 dollars to buy 1 euro. If the strike were below 1.2000, then the call would allow us to buy more euro than is currently the case, which cannot be correct. The strike of the option must be above 1.2000.