You Have Written a Call Option on £10,000 with a Strike

question 83

Multiple Choice

You have written a call option on £10,000 with a strike price of $20,000. The current exchange rate is $2.00/£1.00 and in the next period the exchange rate can increase to $4.00/£1.00 or decrease to $1.00/€1.00 . The current interest rates are i_$ = 3% and are i_£ = 2%. Find the hedge ratio and use it to create a position in the underlying asset that will hedge your option position.

• A)Buy £10,000 today at $2.00/£1.00
• B)Enter into a short position in a futures contract on £6,666.67
• C)Lend the present value of £6,666.67 today at i_£ = 2%
• D)Enter into a long position in a futures contract on £6,666.67
• E)Both c and d would work
• F) None of the above

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