Question
1. Steven has a cash outflow of 1 million euros () on a payable that is due in one year. The spot rate of exchange
1. Steven has a cash outflow of 1 million euros () on a payable that is due in one year. The spot rate of exchange is8.00/. a. Steven can hedge his exposure with a euro forward contract at the 8.00/ forward rate. b. Steven can hedge his exposure with a 1-year euro option at a strike price of 8.00/. At this strike price, call option price is 0.50/ and Put option price 0.50/.
2. Steven has a cash inflow of 1 million pounds () on a receivable that is expected in one year. The spot rate of exchange is 9.00/. a. Steven can hedge his exposure with a pound forward contract at the 9.00/ forward rate. b. Steven can hedge his exposure with a 1-year pound option at a strike price of 9.00/. At this strike price, call option price is 0.50/ and Put option price is 0.50/.
Suppose risk-free interest rates in tgrg, euros, and pounds are i = i = i = 2%. Use the Bigger-Hull option pricing model of the Excel to find the implied volatility of the / and / exchange rates in problems 1 and 2 above.
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