Question II: Suppose that the exchange rate is $0.92/e. Let rs= 4%, and re= 3%, u = of binomial periods 1.2, d = 0.9, T = 0.75, numbe 3, and K = $1.00 Use Binomial Option pricing to answer the following two %3D questions. (a) What is the price of a 9-month European call? (b) What is the price of a 9-month American call?

Question II: Suppose that the exchange rate is $0.92/e. Let rs= 4%, and re= 3%, u = of binomial periods 1.2, d = 0.9, T = 0.75, numbe 3, and K = $1.00 Use Binomial Option pricing to answer the following two %3D questions. (a) What is the price of a 9-month European call? (b) What is the price of a 9-month American call?

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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use binomial option pricing model for this question. suppose the current spot rate for USD/CHF is 0.7. you need to find the one-year call option price of USD/CHF with the exercise price of 0.68 USD/CHF. Assume that our future states will be either 0.7739 U&SD/CHF or 0.6332 USD/CHF. 1) What are the payoffs of a call option (for both states) 2) what is the hedge ratio of the call option?
Assume spot rate for Euro is $1.1900 and the three-month forward rate is $1.1710. What is the minimum price that a six-month American put option with a striking price of $1.220 should sell for in a rational market? Assume the annualized six-month Euro rate is 0.5 percent. O $0.0489 O $0 O $0.0300 $0.0389
Suppose you have the following spot exchange rates: USD/AUD 0.5300 AUD/EUR 1.6428 USD/EUR 0.8782 a) Calculate the US dollar profit (per 1 USD), if any, on a three-point arbitrage. b) Calculate AUD profit (per 1 AUD), if any, on a three-point arbitrage. c) How can you explain the answers in (1) and (2)?
A. Suppose the dollar interest rate and the euro interest rate are the same and equal 2 percent per year. Suppose the expected future $/€ exchange rate is $1.20 per 1 €. Suppose now Euro interest rate decreases to 1 percent per year. Determine how the new equilibrium $/€ exchange rate will change if the US interest rate remains constant. B. Indicate how the change in the Euro interest rate will affect the equilibrium $/€ exchange rate and the expected return on euro assets. Explain the changes on the graph.
Assume the spot Swiss franc is $0.7040 and the six-month forward rate is $0.7030. What is the Value of a six-month call and a put option with a strike price of $0.6840 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
Assume the spot Swiss franc is $0.7045 and the six-month forward rate is $0.7040. What is the Value of a six-month call and a put option with a strike price of $0.6845 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
find a formula for the price of European call option. if R=0 and S=(0)=X=1. Compute the price for U=0.01 and D=-0.19
For a call option of CN¥100,000 with the $0.16 exercise price and $0.0005 premium, When the spot exchange rate is $0.1602, the call option holder should __ the call? a. exercise b. not exercise
4. 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.
5. A U.S. firm expects a receivable (cash inflow) of €1,000,000 in six months. The current exchange rate is $1.125/€. Firm wants to sell euros in six months (to convert the inflow into dollars). Consider 3 possible spot prices in six months. 1. $1.195/€ 2. $1.100/€ 3. $1.025/€ What kind of option, put or call, is appropriate to hedge with? In each scenario, what is the total amount of the firm's NET receivable? NET receivable implies you should consider the receivable as well as the hedging costs of buying the option. (Assume an option exercise price of $1.130/€ and option premium of $.016/€) | 1. 2. 3.
Suppose the exchange rate is $1.71/€. Let r$ = 2%, r€ = 7%, u = 1.16, d = 0.78, and T = 2. Using a 2-step binomial tree, calculate the value of a $1.70-strike American call option on the euro. a.$0.1253 b. $0.1220 c. $0.1118 d. $0.1196 e. $0.1172
Assume you can exchange $1 for either £1.0 or €0.50 in the U.S. In the London market, you can exchange £1 for €0.52. This situation creates an opportunity to profit immediately from which one of the following? A. Futures arbitrage B. Currency hedge C. Interest rate swap D. Absolute purchasing power parity E. Triangle arbitrage

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