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Table 1.1 Spot and forward quotes for the USD/GBP exchange rate, May 6, 2013 (GBP = British pound; USD = US dollar; quote is number
Table 1.1 Spot and forward quotes for the USD/GBP exchange rate, May 6, 2013 (GBP = British pound; USD = US dollar; quote is number of USD per GBP). Bid Offer Spot 1.5541 1.5545 1-month forward 1.5538 1.5543 3-month forward 1.5533 1.5538 6-month forward 1.5526 1.5532 Problem 1.2 Suppose that in the situation of Table 1.1 a corporate treasurer said: "I will have 1 million to sell in six months. If the exchange rate is less than 1.52, I want you to give me 1.52. If it is greater than 1.58 I will accept 1.58. If the exchange rate is between 1.52 and 1.58, I will sell the sterling for the exchange rate." a) How could you use options to satisfy the treasurer? b) Draw a payoff diagram showing potential outcomes for the treasurer. Table 1.1 Spot and forward quotes for the USD/GBP exchange rate, May 6, 2013 (GBP = British pound; USD = US dollar; quote is number of USD per GBP). Bid Offer Spot 1.5541 1.5545 1-month forward 1.5538 1.5543 3-month forward 1.5533 1.5538 6-month forward 1.5526 1.5532 Problem 1.2 Suppose that in the situation of Table 1.1 a corporate treasurer said: "I will have 1 million to sell in six months. If the exchange rate is less than 1.52, I want you to give me 1.52. If it is greater than 1.58 I will accept 1.58. If the exchange rate is between 1.52 and 1.58, I will sell the sterling for the exchange rate." a) How could you use options to satisfy the treasurer? b) Draw a payoff diagram showing potential outcomes for the treasurer
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