Question
Use the following information to answer the following. An American traveller need to purchase 20,000 in one period and wishes to use options to fully
Use the following information to answer the following. An American traveller need to purchase 20,000 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: St=0($USD/) = 1.5; Interest rates: i$usd = 7.10%; i = 5.00% per period Option (call or put): European; strike price = $1.50/; contract size = 10,000; expiry at t=1. In one period (t=1), the two possibilities are: St=1($/) = 1.8 or St=1($/) = 1.2. For numerical answers, give your answer to two decimal places unless stated otherwise, and do not enter any symbols such as dollars, commas or percent signs. Considering the use of a call option i.e the right to buy 20,000 Euros Calculate the risk neutral probability of an up move in the exchange rate. (2 Marks) Answer Calculate the value of the call option today in USD. (2 Marks) $Answer The cost of a put option using the same information denominated in USD should be Answer the value of the call option. (2 Marks) To adjust the value of the call option in USD to the put option in Euros you should use the Answer rate. (2 marks)
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