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:

Inspiration

Inspiration refers to the process of taking air into the lungs, a vital component of respiration, driven by muscle contraction and negative pressure inside the chest.

Ventral Respiratory Group

A cluster of neurons in the brainstem that play a crucial role in controlling voluntary and involuntary breathing.

Intercostal Nerves

The nerves that run between the ribs and are responsible for conveying information to and from the thoracic area of the chest.

Diaphragm

A dome-shaped, muscular partition separating the thoracic cavity from the abdominal cavity, playing a major role in breathing by contracting and expanding the lungs.