Consider an Option to Buy €12,500 for £10,000 USING RISK NEUTRAL VALUATION,find the Value of the Call (In

question 67

Essay

Consider an option to buy €12,500 for £10,000.In the next period,the euro can strengthen against the pound by 25 percent (i.e.,each euro will buy 25 percent more pounds)or weaken by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.

$\begin{array}{lll}&spot Rates&Risk-tree Rates\\S_{0}(\$ / €) & \$ 1.60=€ 1.00&i \$ 3.00 \% \\S_{0}\left(\$ / £)\right. & \$ 2.00=£ 1.00&i €4.00 \% \\S_{0}\left(€ /£)\right. & € 1.25=£ 1.00&i £4.00 \%\end{array}$ USING RISK NEUTRAL VALUATION,find the value of the call (in pounds)

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Definitions:

Retrieval Cues

Specific stimuli or prompts that aid the recall of information stored in long-term memory, enhancing the ability to retrieve previously learned material.

Actor-observer Effect

The inclination to ascribe personal actions to external factors, while assigning the actions of others to their inherent traits.

Vicarious Reinforcement

Learning to replicate behavior by observing the consequences of others’ actions, rather than experiencing them firsthand.

Passive Avoidance Learning

A type of learning in which an individual learns to refrain from engaging with a negative or harmful stimulus.