You Have Written a Call Option on £10,000 with a Strike

question 47

Multiple Choice

You have written a call option on £10,000 with a strike price of $20,000.The current exchange rate is $2.00/£1.00 and in the next period the exchange rate can increase to $4.00/£1.00 or decrease to $1.00/€1.00 .The current interest rates are i_$ = 3% and are i_£ = 2%.Find the hedge ratio and use it to create a position in the underlying asset that will hedge your option position.

• A)Enter into a short position in a futures contract on £6,666.67
• B)Lend the present value of £6,666.67 today at i_£ = 2%
• C)Enter into a long position in a futures contract on £6,666.67
• D)Lending the present value of £6,666.67 today at i_£ = 2% or entering into a long position in a futures contract on £6,666.67 would both work.

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