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

question 53

Multiple Choice

Consider a 1-year call option written on £10,000 with an exercise price of $2.00 = £1.00. The current exchange rate is $2.00 = £1.00; The U.S. risk-free rate is 5% over the period 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) . If you write 1 call option, what is the value today (in dollars) of the hedge portfolio?

• A)£6,666.67
• B)£6,349.21
• C)$12,698.41
• D)$20,000
• E)None of the above

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Definitions:

Population Size

The total number of individuals within a species or specific group living in a designated geographical area.

Self-Incompatibility

A mechanism in plants that prevents self-fertilization and encourages cross-pollination by rejecting pollen from the same or genetically similar individuals.

Hermaphroditic

Describes an organism that possesses both male and female reproductive organs, allowing it to perform both roles in reproduction.

Allele Frequency

The proportion of all copies of a particular gene in a population that are of a given allele type, influencing genetic diversity and evolution.