Homework

Please show calculations

1) Find the time value of a European put option for 1 with strike price of 1.7$/ that is currently selling for $0.10 if the current spot exchange rate is 1.8$/.

2) If c₀ is the price of an American call option with strike X and p₀ is the price of an American put option with strike X, then an increase in the domestic interest rate will lead to (circle the answer): Higher/lowero change c₀ and higher/lowero change p₀

3) Ignoring time value of money, what is your maximum possible gain if you sold a call option for 1 with strike price of 1.5$/ for $0.22 and, at the same time, sold a put option on 1 with strike price of 1.4$/ for $0.14

4) Find the price of a 1-year put option on 1 with strike price of 1.6$/, if call option with the same strike price is selling for $0.23, U.S. interest rate is 8% and 1-year forward rate is 1.7$/

5) Find the U.K. interest rate if 1-year forward $/ exchange rate is 1.66$/, the spot exchange rate is 1.63$/, and interest rate in the U.S. is 4%.

6) If U.S. interest rate is lower than U.K. interest rate, you can say that

a) USD is expected to depreciate

b) USD is expected to appreciate

c) PPP is violated but RPPP may be satisfied

d) RPPP is violated

e) International Fisher Effect is wrong

f) None of the above

7) Can you make arbitrage if you have the following data: spot $/ bid-ask exchange rates are 1.66-1.68 $/; 1-year forward bid-ask exchange rates are 1.62-1.63$/; borrowing rate in the U.S. is 5% and investment rate in the U.S. is 4%; borrowing rate in the U.K. is 7% and investment rate in the U.K. is 6%? If arbitrage is possible, provide a possible strategy. If not, provide the proof.

8) A few days ago you bought one put option for 1 at strike price 1.6$/. The option's premium was $0.10 and, at that time, the strike price was 1.62$/. Today the strike price is 1.59$/. You can say that today your option is ___________________

a) At the money

b) Around the money

c) Above the money

d) In the money

e) On the money

f) Under the money

g) Below the money

h) Out of the money

9) Yesterday the spot exchange rate was 1.72$/ and May futures rate was 1.78$/. Today the spot rate increased to 1.73$/ while May futures rate decreased to 1.76$/. If yesterday you sold one futures contract for 100,000, did you win or lost money and how much? Important: You must specify whether you won or lost and provide the specific dollar amount.

Homework Please show calculations 1) Find the time value of a European put option for 1 with strike price of 1.7$/ that is currently selling for $0.10 if the current spot exchange rate is 1.8$/. 2) If c0 is the price of an American call option with strike X and p0 is the price of an American put option with strike X, then an increase in the domestic interest rate will lead to (circle the answer): Higher/lowero change c0 and higher/lowero change p0 3) Ignoring time value of money, what is your maximum possible gain if you sold a call option for 1 with strike price of 1.5$/ for $0.22 and, at the same time, sold a put option on 1 with strike price of 1.4$/ for $0.14 4) Find the price of a 1-year put option on 1 with strike price of 1.6$/, if call option with the same strike price is selling for $0.23, U.S. interest rate is 8% and 1-year forward rate is 1.7$/ 5) Find the U.K. interest rate if 1-year forward $/ exchange rate is 1.66$/, the spot exchange rate is 1.63$/, and interest rate in the U.S. is 4%. 1 6) If U.S. interest rate is lower than U.K. interest rate, you can say that a) USD is expected to depreciate b) USD is expected to appreciate c) PPP is violated but RPPP may be satisfied d) RPPP is violated e) International Fisher Effect is wrong f) None of the above 7) Can you make arbitrage if you have the following data: spot $/ bid-ask exchange rates are 1.66-1.68 $/; 1-year forward bid-ask exchange rates are 1.62-1.63$/; borrowing rate in the U.S. is 5% and investment rate in the U.S. is 4%; borrowing rate in the U.K. is 7% and investment rate in the U.K. is 6%? If arbitrage is possible, provide a possible strategy. If not, provide the proof. 8) A few days ago you bought one put option for 1 at strike price 1.6$/. The option's premium was $0.10 and, at that time, the strike price was 1.62$/. Today the strike price is 1.59$/. You can say that today your option is ___________________ a) At the money b) Around the money c) Above the money d) In the money e) On the money f) Under the money g) Below the money h) Out of the money 9) Yesterday the spot exchange rate was 1.72$/ and May futures rate was 1.78$/. Today the spot rate increased to 1.73$/ while May futures rate decreased to 1.76$/. If yesterday you sold one futures contract for 100,000, did you win or lost money and how much? Important: You must specify whether you won or lost and provide the specific dollar amount. 2