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Consider an option to buy 12,500 for 10,000. In the next period, the euro can strengthen against the pound by 25 percent (i.e., each euro
Consider an option to buy 12,500 for 10,000. In the next period, the euro can strengthen against the pound by 25 percent (i.e., each euro will buy 25 percent more pounds) or weaken by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
| Spot Rates | Risk-Free Rates | ||||
| S0($/) | $1.60 = 1.00 | i$ | 3.00% | ||
| S0($/) | $2.00 = 1.00 | i | 4.00% | ||
| S0(/) | 1.25 = 1.00 | i | 4.00% | ||
If the call finishes in-the-money what is your portfolio cash flow
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