Consider an Option to Buy €12,500 for £10,000 Find the Cost Today of Your Hedge Portfolio in Pounds

question 19

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 cost today of your hedge portfolio in pounds.

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Definitions:

Eigenwelt

A term used in existential psychology referring to the internal, personal world of an individual; how one perceives and interprets one's own existence.

Biological Experiences

Refers to the ways in which biological factors, including genetics, health, and brain function, affect an individual's behavior and experiences.

Mortality

refers to the state of being mortal or the incidence of death in a population.

Existential Philosophers

Thinkers who focus on questions about human existence, freedom, and the meaning of life.