Examlex

Solved

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.

spotRatesRisktreeRatesS0($/)$1.60=1.00i$3.00%S0($/£)$2.00=£1.00i4.00%S0(/£)1.25=£1.00i£4.00%\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?


Definitions:

Problem Solving

The process of identifying issues, generating solutions, and implementing choices to address challenges.

Directions

Instructions or guidance on how to perform tasks, proceed with plans, or navigate spatially.

Feedforward

A communication process that involves providing future-focused feedback or information to preempt or guide actions.

Feedback Control System

A system that regulates its own operation by monitoring its output and making necessary adjustments to maintain a desired state or performance.

Related Questions