Call Options on British Pounds (Option.xls) The set of assumptions used throughout the second half of this chapter assumed a spot rate of \(\$ 1.70 / £\), a 90 -day maturity, U.S. dollar and British pound 90 -day interest rates of \(8.00 \%\) per annum, and a \(\$ / £ 90\)-day volatility of \(10 \%\). Use these assumptions and the option pricing spreadsheet, Option.xls. Answer the following questions by using alternative values in the spreadsheet.

Note: Check that all is working correctly by first using the baseline values pictured below and calculating the same option premiums (use only the European option prices and "Greeks" to answer the following questions). Also note that the \(\$ 1.70 / £\) spot rate should be entered as 170.00 cents per pound.

a. If the spot rate suddenly changed-for example, the pound falling to \(\$ 1.65 / £\)-what would be the new 90 -day call option premium?

b. If the British government responded to the falling pound by defending it with an interest rate increase, say, from \(8.000 \%\) to \(8.250 \%\) per annum, what would the value of the call option premium be?

c. As a result of the falling pound and the policy decision to defend it with increasing interest rates, the British Prime Minister is thought to be about to lose political support. The volatility of the dollar-pound cross rises from \(10 \%\) to \(12 \%\). What is the new 90 -day call option premium?