Consider an Option to Buy €12,500 for £10,000 Find the Risk Neutral Probability of an "Up" Move

question 81

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.

$\begin{array}{lll}&spot Rates&Risk-tree Rates\\S_{0}(\$ / €) & \$ 1.60=€ 1.00&i \$ 3.00 \% \\S_{0}\left(\$ / £)\right. & \$ 2.00=£ 1.00&i €4.00 \% \\S_{0}\left(€ /£)\right. & € 1.25=£ 1.00&i £4.00 \%\end{array}$ Find the risk neutral probability of an "up" move.

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Definitions:

Sociocultural Perspective

A psychological approach that emphasizes the influence of societal and cultural factors on individual behavior and mental processes.

Psychodynamic Perspective

A psychological approach that emphasizes the systematic study of the psychological forces that underlie human behavior, feelings, and emotions and how they might relate to early experience.

Cognitive Perspective

An approach in psychology that emphasizes the importance of mental processes in how people perceive, remember, think, and solve problems.

Learning Perspective

A theoretical viewpoint that emphasizes the role of experience and learning in shaping behavior.