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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%

Find the cost today of your hedge portfolio in pounds.

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