Use the following information to answer the following.

An American traveller need to purchase 10,000 in one period and wishes to use options to fully hedge their exposure.

The current market information at t=0 is as follows:

Spot rates: S_t=0($USD/) = 1.5; Interest rates: i_$usd = 7.10%; i = 5.00% per period Option (call or put): European; strike price = $1.50/; contract size = 10,000; expiry at t=1.

In one period (t=1), the two possibilities are: S_t=1($/) = 2 or S_t=1($/) = 1.

Considering the use of a call option on 10,000

Calculate the risk neutral probability of an up move in the exchange rate. Give your answer as a decimal - do not use percentages or the % sign. (2 Marks)

Answer

Calculate the value of the call option today in USD. Do not enter $ signs or commas. (3 Marks)

$ Answer