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

question 53

Multiple Choice

Consider a 1-year call option written on £10,000 with an exercise price of $2.00 = £1.00. The current exchange rate is $2.00 = £1.00; The U.S. risk-free rate is 5% over the period 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) . If you write 1 call option, what is the value today (in dollars) of the hedge portfolio?

• A)£6,666.67
• B)£6,349.21
• C)$12,698.41
• D)$20,000
• E)None of the above

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