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

question 27

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.

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

---

Definitions:

Copyrights

Legal protections granted to creators of original works, giving them exclusive rights to use, reproduce, and distribute their creations for a certain period.

Patents

Legal rights granted to inventors, giving them exclusive rights to use, make, and sell their inventions for a certain period.

Global Protection

Refers to international measures and strategies implemented to safeguard the environment, human rights, and economic interests on a worldwide scale.

Intellectual Property

Rights based on creations of the mind in areas such as industry, science, literature, and arts.