Chapter 5, Problem 8QA

There is a European call option on the dollar with strike price of Kc = 94 pence per dollar and a European put option on the dollar with a strike price of Kp = 100 pence per dollar. Both have a notional N = 1 and both expire at date T. The current (date t) price of one dollar is St = 100 pence. The current prices of call option is 27.5 (55/2) pence and the price of the put option is 8.33 (25/3) pence. The sterling interest rate for borrowing and lending between dates t and T is 20% (1/5) and the corresponding dollar interest rate is 25% (1/4). Whatarethecurrent (datet) intrinsic and time value of the call and put options?

You write a call option with a strike of $1.473/£ and a premium of $0.72. The current spot exchange rate is $1.434/£. What is the option's intrinsic value?

An increase in which of these factors increases the premium of a currency call option? Check all that apply: Spot exchange rate Volatility of the currency Strike price Time to expiration

Consider a one period binomial model of a currency option on the dollar. Thecurrent (date t = 0) spot exchange rate is S0 = 75 pence per dollar. The spot rateat the end of the period will be either Su = 100 pence or Sd = 60 pence. The UKrisk-free interest rate over the period is rs = 1/3 (33.3333%) and the US risk-freerate of interest is rd = 1/4 (25%). There is a call option with a strike price ofK = 68 pence and a forward contract with a price of F = 80 pence. Show how touse the forward contract and the UK money market to replicate the payoffs to thecall option and hence, find the price of the call option.

i sold a call option with an exercise price of $1.20/euro. the premium was $0.02/euro. what is my profit or loss if the exchange rate is $1.18/euro?

Analyse the scenario below. In each case, explain your reasoning Suppose that the current EUR/GBP exchange rate is £0.92 per euro. The current2-year interest rates are: GBP 4%, EUR 5%. Suppose further that you can use a 2-year forward contract with a EUR/GBP rate of £0.91 per euro. Could this contractbe used for an arbitrage opportunity? If yes, provide an example. Calculatearbitrage profit and explain how this profit can be earned

You buy a European put option priced at $0.025/€ on €225,000 at a strike price of $1.50/€. If at maturity, the observed price is $1.60/€, what is the total net cash flow involved at the end of this investment whether you exercise or do not exercise this option?

An investor is expecting that the euro either will sharply increase or sharply decrease against the Japanese Yen. The investor purchases 2 options   1) a currency put option on the euro with a strike price (exchange rate) of ¥127/€. When the investor purchases the contract, the spot rate of the euro is equivalent to ¥127/€.   the premium is ¥2/€   2) a currency call option on the euro with a strike price (exchange rate) of ¥127/€. When the investor purchases the contract, the spot rate of the euro is equivalent to ¥127/€.   the premium is ¥1/€   a) Assume the euro's spot price at the expiration date (market price) is ¥139/€ The investor's profit =  ¥/€     b) Assume the euro's spot price at the expiration date (market price) is ¥118/€ The investor's profit =  ¥/€     c) What is the maximum loss  Maximum loss =   ¥/€

A trader buys a six-month European call option and sells a six-month European put option.  The options have the same underlying asset and the same strike price K.  Can you identify a forward contract that has the same payoff as the trader’s combined options position?  Under what circumstances does the price of the call equal the price of the put? (HINT: In answering these questions you may find it helpful to draw charts of the payoffs or profits of the two positions.)