1. Find the dollar value today of a 1-period at-the-money call option on 10,000. The spot exchange rate is 1.00 = $1.25. In the next period, the euro can increase in dollar value to $2.00 or decrease to $0.80. The risk free rate in dollars is i_$ = 17.60%; the risk free rate in euro is i = 5.00%.

EXTRA CREDIT

2. Verify that your answer to question 1 is also the dollar value today of a 1-period at-the-money put option on $12,500 with a strike price of 10,000. In the next period, the U.S. dollar can increase from todays 0.80 = $1.00 to 1.25 = $1.00 or decrease to 0.50 = $1.00. The risk free rate in dollars is i_$ = 17.60%; the risk free rate in pounds is i = 5.00%. Hint: draw a new tree denominated in pounds sterling. Calculate a new risk-neutral probability. If it wasnt a challenge I wouldnt offer ten points extra credit.