Value a 1-Year Call Option Written on £10,000 with an Exercise

question 11

Multiple Choice

Value a 1-year call option written on £10,000 with an exercise price of $2.00 = £1.00.The spot exchange rate is $2.00 = £1.00; The U.S.risk-free rate is 5% and the U.K.risk-free rate is also 5%.In the next year,the pound will either double in dollar terms or fall by half (i.e.u = 2 and d = ½) .Hint: H = ?.

• A)$6,349.21
• B) \(\$ 6,666.67 = \$ 20,000 - ( £ 10,000 - £ 6,666.67 ) \times \frac { \$ 4.00 } { £ 1.00 }\)
• C) \(\$ 6,666.67 = £ 6,666.67 \times \frac { \$ 1 } { £ 1 }\)
• D)None of the above

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Definitions:

Egocentrism

The cognitive inability to differentiate between one's own perspective and another person's perspective, often noticed in children but can also occur in adults.

Conservation

The act of preserving, protecting, or restoring natural environments and wildlife to prevent depletion or extinction.

Abstract Thought

The ability to think about objects, principles, and ideas that are not physically present. It is a level of thinking that involves processing ideas beyond concrete reality.

Reversibility

In cognitive development, reversibility refers to the understanding that objects can be changed and then returned back to their original form or condition, a concept introduced by Jean Piaget.