Consider an Option to Buy £10,000 for €12,500 Calculate the Hedge Ratio

question 89

Essay

Consider an option to buy £10,000 for €12,500.In the next period,if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent.On the other hand,the euro could depreciate against the pound by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.

$\begin{array}{lll}&spot Rates&Risk-tree Rates\\S_{0}(\$ / €) & \$ 1.60=€ 1.00&i \$ 3.00 \% \\S_{0}\left(\$ / £)\right. & \$ 2.00=£ 1.00&i €4.00 \% \\S_{0}\left(€ /£)\right. & € 1.25=£ 1.00&i £4.00 \%\end{array}$ Calculate the hedge ratio.

Understand the concepts of experimental and control groups.

Grasp the chief advantages of experimental methods.

Comprehend the importance of random selection and assignment in experiments.

Identify the independent and dependent variables in an experiment.

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