Consider an Option to Buy €12,500 for £10,000 If the Call Finishes Out-Of-The-Money What Is Your Portfolio Cash

question 68

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.

$\begin{array}{lll}&spot Rates&Risk-tree Rates\\S_{0}(\$ / €) & \$ 1.60=€ 1.00&i \$ 3.00 \% \\S_{0}\left(\$ / £)\right. & \$ 2.00=£ 1.00&i €4.00 \% \\S_{0}\left(€ /£)\right. & € 1.25=£ 1.00&i £4.00 \%\end{array}$ If the call finishes out-of-the-money what is your portfolio cash flow?

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Definitions:

Arrector Pili

Small muscles attached to hair follicles that, when contracted, cause the hairs to stand up, producing what is commonly known as goosebumps.

Epidermis

The skin's outermost layer, offering a waterproof shield and determining the color of our skin.

Dermis

The layer of skin beneath the epidermis, containing nerve endings, sweat and sebaceous glands, and blood and lymph vessels, providing structure and elasticity.

Stratum Basale

The deepest layer of the epidermis, consisting of stem cells capable of undergoing cell division to form new cells, replenishing the skin.