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3. Suppose the Euro-Dollar exchange rate is 1.1672 $/. Assume that the volatility of the exchange rate o = 15%, the US annualized continuously compounded
3. Suppose the Euro-Dollar exchange rate is 1.1672 $/. Assume that the volatility of the exchange rate o = 15%, the US annualized continuously compounded one year interest rate is 4.13%, and the Euro annualized con- tinuously compounded one year interest rate is 2.13%. (a) Use Black-Scholes to calculate the dollar value of a European option to buy 1,000,000 at a price of $1,200,000 in one year. As always, think of the $ price of 1 Euro as the price of a divi- dend paying stock. Or you can think, alternatively, of the $ price of bond with a face of 1 as the price of the stock(which then pays no dividends). (b) If the Delta and the Gamma of the option are 0.51 and 2.33 (per Euro), respectively, and the Euro price fell one cent immediately after you bought the call, approximately how much did you make or lose? Please answer part (b) without using the Black-Scholes formula! Calculate the change in the call price, dc, in terms of the Greeks and the changes in the parameters impacting call value. 3. Suppose the Euro-Dollar exchange rate is 1.1672 $/. Assume that the volatility of the exchange rate o = 15%, the US annualized continuously compounded one year interest rate is 4.13%, and the Euro annualized con- tinuously compounded one year interest rate is 2.13%. (a) Use Black-Scholes to calculate the dollar value of a European option to buy 1,000,000 at a price of $1,200,000 in one year. As always, think of the $ price of 1 Euro as the price of a divi- dend paying stock. Or you can think, alternatively, of the $ price of bond with a face of 1 as the price of the stock(which then pays no dividends). (b) If the Delta and the Gamma of the option are 0.51 and 2.33 (per Euro), respectively, and the Euro price fell one cent immediately after you bought the call, approximately how much did you make or lose? Please answer part (b) without using the Black-Scholes formula! Calculate the change in the call price, dc, in terms of the Greeks and the changes in the parameters impacting call value
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