An American put option to sell a British pound for dollars has a strike price of $1.5 and a time to maturity of 1 year. The volatility of the pound/dollor exchange rate is 15% per annum, the dollar interest rate is 6%, the British pound interest rate is 7%, per annum, and the current exchange rate is 1.52. Use a three-step binomial tree to value the option.

An American put option to sell a British pound for dollars has a strike price of $1.5 and a time to maturity of 1 year. The volatility of the pound/dollor exchange rate is 15% per annum, the dollar interest rate is 6%, the British pound interest rate is 7%, per annum, and the current exchange rate is 1.52. Use a three-step binomial tree to value the option.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Suppose a U.S. investor wishes to invest in a British firm currently selling for £100 per share. The investor has $24,000 to invest, and the current exchange rate is $2/£. Consider three possible prices per share at £95, £100, and £105 after 1 year. Also, consider three possible exchange rates at $1.60/£, $2/£, and $2.40/£ after 1 year. Calculate the standard deviation of both the pound- and dollar-denominated rates of return if each of the nine outcomes (three possible prices per share in pounds times three possible exchange rates) is equally likely. (Do not round intermediate calculations. Round your percentage answers to 2 decimal places.) .
i sold a call option with an exercise price of $1.20/euro. the premium was $0.02/euro. what is my profit or loss if the exchange rate is $1.205/euro?
A European put option contract with an exercise price of $1.65 per pound and a contract size of £32,000 is currently trading at a premium of $0.18 per pound. Required: a-1. If you buy this contract, what spot exchange rate at maturity will maximize your profit? a-2. If you buy this contract, what is the amount of the maximum possible profit from one contract? b. If you buy this contract, what is your maximum possible loss from one contract? c. If you sell this contract, what is your maximum possible profit on this contract? d-1. If you sell this contract, what is your maximum possible loss from one contract? d-2. At what future spot exchange rate will you maximize your loss? e. At what future spot exchange rate, will either the buyer or seller of this contract break even?
Suppose that the current spot price of corn is $720 per bushel. The one year risk-free rate is 6% per annum. The futures price for delivery of one bushel of corn in one year’s time is $792 per bushel. Assume that net costs (storage costs minus convenience yield) are $15 per bushel (over the next one year). Is the futures contract correctly priced? If not, what is the theoretically correct price for the futures contract and how could you take advantage of any mispricing? Please show full steps and explain.
A European put option on a barrel of crude oil with a strike price of $50 and a maturity of one-month, trades for $3.0. What is the price of the call premium with identical strike price and time until expiration, if the one-month risk-free rate is 2% and the spot price of the underlying asset is $52? NAME TYPE STRIKE PRICE PRICE AT EXPIRATION DATE A PUT 100 115 B CALL 100 95 C PUT 80 70 D CALL 80 95 A. Which of the following options are in the money? B. Which of the following options are out of the money? C. What is the intrinsic value of the C option? D. What is the upper bound and lower bound of the B option above?
Wesfarmers has developed the following probability distribution for the spot rate of the Indian rupee (INR) against the Australian dollar (A$) in six months to buy call options on INR1.50 million with an exercise price of A$0.3169 and a premium of A$0.0383. A$0.2406 [39 per cent probability] A$0.4580 [31 per cent probability] A$0.5743 [(100-39-31) per cent probability] What is the expected value of the cash to be paid in A$ for the call option hedge?
European put and call options both have an exercise price of GH¢50 that expires in 120 days.The underlying asset is priced at GH¢52 and makes no cash payments during the life of theoption. The risk-free rate is 4.5%. Find the price of the call option.
Assume the spot Swiss franc is $0.7070 and the six-month forward rate is $0.7090. What is the Value of a six-month call and a put option with a strike price of $0.6870 should sell for in a rational market? Assume the annualized six-month Eurodollar rate is 3.50 percent. Assume the annualized volatility of the Swiss franc is 14.20 percent. Use the European option-pricing models to value the call and put option. This problem can be solved using the FXOPM.xls spreadsheet. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Option Call Put Value cents cents
The current spot exchange rate is $1.25/€ and the three-month forward rate is \$ 1.3 / epsilon . Consider a three-month European put option on €125,000 with a strike price of $ 1.2 / epsilon . If you pay an option premium of $5,000 to buy this put option, at what exchange rate will you break-even? Group of answer choices \$ 1.24 / epsilon $ 1.16/€ $1.20/€ $1.34/€
Assume oat forward prices over the next 3 years are $2.30, $2.40, and $2.33, respectively. Effective annual interest rates over the same period are 5.5%, 5.8%, and 6.1%. What is the 3-year swap price if the delivery in year 1 is 100,000 bushels, the delivery in year 2 is 125,000 bushels and the delivery in year 3 is 175,000 bushels?
Assume the spot Swiss franc is $0.7085 and the six-month forward rate is $0.7120. What is the Value of a six-month call and a put option with a strike price of $0.6885 should sell for in a rational market? Assume the annualized six-month Eurodollar rate is 3.50 percent. Assume the annualized volatility of the Swiss franc is 14.20 percent. Use the European option-pricing models to value the call and put option.
am. 289.

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