Help here.
4. Consider a one-period call option on the British pound. Suppose that the current exchange rate is UsD/GBP 2, the exercise price is usD/GBP 1.9, the one- period risk-free rate on the uso is 5 percent, and the one-period risk-free rate on the GBP is 10 percent. Suppose that the spot rate can either go up by a factor of 1.1 (to usD/GBP 2.2) or down by 0.9 (to usD/GBP 1.8). 15:01 on 8 March 2009 P. Sercu, K.U.Leuven SB&E 67 (a) Write down the two equations that show how one can replicate the cash flow from the option by investing in the foreign currency and borrowing domestically. What is the value of the call option, using the replication approach? (b) Compute the risk-neutral probabilities and use these to value the above call option.5. Suppose that the currentspot rate is So = USD/GBP 2 and the one-period interest rates today are r is 5 percent and r" is 10 percent. Also, you are given that in the next period the spot rate will either be usp/GBP 2.2 or USD/GBP 1.8. (a) What is the value today of a one-period put option on the GBP that has a strike price of UsD/GBP 1.9? (b) Suppose that you already hold this put option. If you wish to hedge the payoff from the put, so that the net payoffof your portfolio is independent of the exchange rate, how many additional units of the spot should you buy/sell?1. If So = 100 and the spot rate can increase by 6 percent or decrease by 3 percent, what is the spot rate at node: (a) (3,3)? (b) (3,2)? (c) (3,1)? (d) (3,0)?2. Suppose that the current EUR/GBP spot rate is 0.6, the effective risk-free rates of return are r = 6 percent and ne = 8 percent, and the spot rate will either increase to 0.62 or decrease to 0.57 at time 1. (a) What is the risk-adjusted probability of a spot rate increase? Decrease? (b) What is the risk-adjusted expected value of the European call with a strike price of 0.59? (c) What is the time-0 value of the call? (d) What is the factor w(d) by which the spot rate increases? Decreases? (e) What is the option's exposure? (f) Would the option's value change if it were American?4. Suppose that investors from a country have access to a large set of foreign stocks, and that foreign investors can also buy stocks in that country. Which of the following statements is (are) correct? (a) The single-market CAPM, where the market portfolio is measured by the index of all stocks issued by local companies, does not hold. (b) The single-market CAPM, where the market portfolio is measured by the index of all stocks held by local investors, does not hold. (c) The single-market CAPM, where the market portfolio is measured by the index of all stocks held by local investors, is formally correct but not fit for practical use, because the correct index is not readily observable. (d) The single-market CAPM, where the market portfolio measured by the index of all stocks worldwide, is correct provided that there is a unified world market for all stocks. (e) The single-market CAPM, where the market portfolio is measured by the index of all stocks worldwide, is correct provided that there is no (real) exchange risk.4. Harpo, the bright star in the Marx Intellectual Sky, muses that a 99% Vak means 2.33 std's, so the Basel number k = 3 stipulates a capital of just 7 std's. Yet, Harpo wonders, Philippe Jorion writes that almost every year some market moves by 10std's. Thus, Basel is inadequate. Right
