The continuously compounded interest rate on 5-year default-free Australian dollar-denominated bonds is 0.5% per annum. The continuously compounded interest rate on 5-year default-free Euro- denominated bonds is 0.2% per annum. There are no transactions costs. The current exchange rate is $1.50 Australian for 1 Euro. There will be arbitrage opportunities unless a 5-year European-style put option on 50,000 Euro with an exercise price of $90,000 is worth at least O $13,528.88 O $12,777.89 O $57,413.10 O $16,524.60
The continuously compounded interest rate on 5-year default-free Australian dollar-denominated bonds is 0.5% per annum. The continuously compounded interest rate on 5-year default-free Euro- denominated bonds is 0.2% per annum. There are no transactions costs. The current exchange rate is $1.50 Australian for 1 Euro. There will be arbitrage opportunities unless a 5-year European-style put option on 50,000 Euro with an exercise price of $90,000 is worth at least O $13,528.88 O $12,777.89 O $57,413.10 O $16,524.60
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:The continuously compounded interest rate on 5-year default-free Australian dollar-denominated
bonds is 0.5% per annum. The continuously compounded interest rate on 5-year default-free Euro-
denominated bonds is 0.2% per annum. There are no transactions costs. The current exchange rate
is $1.50 Australian for 1 Euro. There will be arbitrage opportunities unless a 5-year European-style
put option on 50,000 Euro with an exercise price of $90,000 is worth at least
O $13,528.88
O $12,777.89
O 557.413.10
O $16,524.60
O $13,524.15
Transcribed Image Text:You sell a European put option with the following parameters: m = -0.6, S = $18, p = $4, r = 1% p
6 p.a.,
%3D
mu =
9% p.a. Both r and mu are continuously compounded. What is the instantaneous continuously-
compounded expected return on your put position?
O +22.6% p.a.
O +20.6% p.a.
O +4.8% p.a.
O-4.8% p.a.
O -20.6% p.a.
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