Value a 1-Year Call Option Written on £10,000 with an Exercise

question 39

Multiple Choice

Value a 1-year call option written on £10,000 with an exercise price of $2.00 = £1.00.The spot exchange rate is $2.00 = £1.00; The U.S.risk-free rate is 5% and the U.K.risk-free rate is also 5%.In the next year,the pound will either double in dollar terms or fall by half (i.e.u = 2 and d = ½) .Hint: H = ⅔.

• A)$6,349.21
• D)None of the above

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Definitions:

Historical Standard Deviation

A statistical measure that quantifies the variability or dispersion of a set of past data points.

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Shares of relatively small companies, which may offer higher growth potential but also come with higher risk.

Long-Term Bonds

Debt securities with a maturity period typically longer than 10 years, offering the holder a fixed or variable interest rate.

Historical Return

Refers to the past performance of an investment or an index, usually expressed as a percentage change from the initial investment.