Consider an option to buy 10,000(Euro) for 12,500(Euro). In the next period, if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent. On the other hand, the euro could depreciate against the pound by 20 percent.

Big hint: don't round, keep exchange rates out to at least 4 decimal places.

Spot Rates Risk-Free Rates

(dollar/euro) dollar 1.60 = euro 1.00 3.00%

(dollar/pound) dollar 2.00 = euro 1.00 4.00%

(euro/pound) euro 1.25 = pound 1.00 4.00%

1) Calculate the current euro/pound spot exchange rate