Consider a one-period call option on the British pound. Suppose that the current exchange rate is usd/gbp

Question:

Consider a one-period call option on the British pound. Suppose that the current is usd/gbp 2, the exercise price is usd/gbp 1.9, the one period risk-free rate on the usd is 5 percent, and the one-period risk-free rate on the gbp is 10 percent. Suppose that the spot rate can either go up by a factor of 1.1 (to usd/gbp 2.2) or down by 0.9 (to usd/gbp 1.8).
(a) Write down the two equations that show how one can replicate the cash flow from the option by investing in the foreign currency and borrowing domestically. What is the value of the call option, using the replication approach?
(b) Compute the risk-neutral probabilities and use these to value the above call option.
Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...