Consider an option to buy £10,000 for €12,500. In the next period, if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent. On the other hand, the euro could depreciate against the pound by 20 percent. Big hint: don't round, keep exchange rates out to at least 4 decimal places. Sø ($/ €) Sø ($/ £) Sø ( €/ £) Spot Rates €1.00 $1.60 $2.00 £1.00 €1.25 = £1.00 Risk-free Rates i$ 3.00% i€ 4.00% if 4.00% If the call finishes out-of-the-money what is your replicating portfolio cash flow?
Consider an option to buy £10,000 for €12,500. In the next period, if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent. On the other hand, the euro could depreciate against the pound by 20 percent. Big hint: don't round, keep exchange rates out to at least 4 decimal places. Sø ($/ €) Sø ($/ £) Sø ( €/ £) Spot Rates €1.00 $1.60 $2.00 £1.00 €1.25 = £1.00 Risk-free Rates i$ 3.00% i€ 4.00% if 4.00% If the call finishes out-of-the-money what is your replicating portfolio cash flow?
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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Transcribed Image Text:Consider an option to buy £10,000 for €12,500. In the next period, if the pound appreciates against the dollar by 37.5 percent
then the euro will appreciate against the dollar by ten percent. On the other hand, the euro could depreciate against the pound
by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Sø ( $/ €)
Sø ($/ £)
SØ ( €/ £)
Spot Rates
$1.60 = €1.00
$2.00 = £1.00
€1.25= £1.00
Risk-free Rates
i$
3.00%
i€
4.00%
if 4.00%
If the call finishes out-of-the-money what is your replicating portfolio cash flow?
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