1. The current spot exchange rate is $1.05/ 1.00; the three-month US dollar interest rate is 2%. Consider a three-month American call option on 10,000 with a strike price of $1.04/1.00. What is the least that this option should sell for? Explain your logic. 2. For European long call options written on euro in dollars (5/8), how does a decrease in exercise price impact the option premium when all else remains the same? 3. Consider the following option strategy using two option contracts (all 60-days-expiry- European options). Buy (long) 1 call X-price - $1.05/ (or 105) at 50.03 Buy (long) 1 put X-price - $1.05/ (or 105) at 50.03 3.1 Plot the payoff chart (i.e., the profit and loss graph) of the option strategy by plotting two option contracts on the same grid paper given to you. 3.2. Compute the net premium paid or earned. 3.3. Compute the maximum loss. 3.4. Compute the maximum profit. 3.5. Compute the lower and upper break-even points. 3.6. Justify why you would like to execute this option strategy 65 points). 4. Find the Black-Scholes price of a six-month call option written on 10,000 with a strike price of $1.08/1.00. The current exchange rate is $1.12/1.00; The U.S. risk-free rate is 2% over the period and the euro-zone risk-free rate is 5%. The volatility of the underlying asset is 15 percent. Compute the call option premium. Show all your work. Use the following formulae. C = [F,.N(d,)-X-N(d) Jew d, In(F,/X)+0.5-02-T 6.VT d, Ed, -o.VT F, =S-e-T 1. The current spot exchange rate is $1.05/ 1.00; the three-month US dollar interest rate is 2%. Consider a three-month American call option on 10,000 with a strike price of $1.04/1.00. What is the least that this option should sell for? Explain your logic. 2. For European long call options written on euro in dollars (5/8), how does a decrease in exercise price impact the option premium when all else remains the same? 3. Consider the following option strategy using two option contracts (all 60-days-expiry- European options). Buy (long) 1 call X-price - $1.05/ (or 105) at 50.03 Buy (long) 1 put X-price - $1.05/ (or 105) at 50.03 3.1 Plot the payoff chart (i.e., the profit and loss graph) of the option strategy by plotting two option contracts on the same grid paper given to you. 3.2. Compute the net premium paid or earned. 3.3. Compute the maximum loss. 3.4. Compute the maximum profit. 3.5. Compute the lower and upper break-even points. 3.6. Justify why you would like to execute this option strategy 65 points). 4. Find the Black-Scholes price of a six-month call option written on 10,000 with a strike price of $1.08/1.00. The current exchange rate is $1.12/1.00; The U.S. risk-free rate is 2% over the period and the euro-zone risk-free rate is 5%. The volatility of the underlying asset is 15 percent. Compute the call option premium. Show all your work. Use the following formulae. C = [F,.N(d,)-X-N(d) Jew d, In(F,/X)+0.5-02-T 6.VT d, Ed, -o.VT F, =S-e-T
