Consider an Option to Buy £10,000 for €12,500 Calculate the Current €/£ Spot Exchange Rate

question 18

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 current €/£ spot exchange rate.

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Definitions:

Argument Mapping

A visual representation of the structure of an argument, showing the relationship between premises and conclusions, to clarify reasoning and evidence.

Analytical Skills

The ability to collect and analyze information, solve problems, and make decisions based on the available data.

Assertion

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Assumption

A thing that is accepted as true or as certain to happen, without proof.