Question
In: Finance
1. Currently, 1 Euro is equivalent to 0.88 GBP (i.e., British pounds). Assume that the interest...
1. Currently, 1 Euro is equivalent to 0.88 GBP (i.e., British pounds). Assume that the interest rate over one (annual) timestep in Britain is rGB = 3.5%, and in Europe, it is rE = 2.0%. Operate in CRR notation with u = 1.1, and d = 1/u throughout this question, and be careful to specify which currency you are using in all answers. (a) Assume that your domestic currency is GBP. (i) Calculate the risk neutral probability for an exchange rate option. Let each time step represent one year, so you can use the interest rates given without conversion. (ii) Construct a 4-step binomial tree for the exchange rate. (iii) Assume the strike rate of an exchange rate (European) call option is k = 1.00 GBP/EUR, and the face value is F = EUR10,000. Construct a binomial tree and calculate the premium of this call option, in GBP. (iv) Using the same strike rate and face value, calculate the premium of an exchange rate European put (in GBP).
Solutions
Expert Solution
Solution:
We will be calculating the risk neutral probability using the respective formula and then drawing the 4step binomial tree using GBP as the base currency or the domestic currency. Please refer the below images for the same.
4) As we can clearly see in the binomial tree that in both the upmove as well as the down move the value of the ex rate is greater then 1. So a put option with a strike of 1 will always be Out of the money and will have a zero payoff as well as zero value.
jeff jeffy answered 1 week agoRelated Solutions
At writing, 1 Euro is equivalent to 0.89 GBP (i.e., British pounds). Assume that the interest...
At writing, 1 Euro is equivalent to 0.89 GBP (i.e., British
pounds). Assume that the
interest rate over one (annual) timestep in Britain is rGB = 1:5%,
and in Europe, it
is rE = 2:0%. Operate in CRR notation with u = 1:15, and d = 1=u
throughout this
question, and specify which currency you are using in all
answers.
Assume that your domestic currency is GBP.
(i) Calculate the risk neutral probability for an exchange rate
option. Let each...
At writing, 1 Euro is equivalent to 0.89 GBP (i.e., British pounds). Assume that the interest...
At writing, 1 Euro is equivalent to 0.89 GBP (i.e., British
pounds). Assume that the
interest rate over one (annual) timestep in Britain is rGB = 1:5%,
and in Europe, it
is rE = 2:0%. Operate in CRR notation with u = 1:15, and d = 1=u
throughout this
question, and specify which currency you are using in all
answers.
Now, instead assume your domestic currency is Euros.
(i) Calculate the risk neutral probability for an exchange rate
option. Let...
Suppose that the exchange rate (spot price) of Euro in GBP (British Pound) is GBP 0.95. ...
Suppose that the exchange rate (spot price) of Euro in GBP
(British Pound) is GBP 0.95. In addition, assume that
you can freely borrow and lend in GBP for any maturity at a rate of
2% per annum and that you can do the same in Euro at a rate of 1%
per annum. Both rates are continuously compounded rates. Given
these assumptions:
Compute the forward price (exchange rate) of the GBP in Euro
for delivery of the GBP in...
Assume the following options are currently available for British pounds (₤): •Call option premium on British...
Assume the following options are currently available for
British pounds (₤):
•Call option premium on British pounds = $.04 per unit
•Put option premium on British pounds = $.03 per unit
•Call option strike price = $1.56
•Put option strike price = $1.53
•One option contract represents ₤31,250.
12. At a long strangle position, what is your profit (loss)
when spot exchange rate changes to $1.40
A. -$0.04
B. +$0.14
C. +$0.10
D. +$0.06
E. -$0.06
13. What is the...
Question 1-3. Assume the following options are currently available for British pounds (₤): •Call option premium...
Question 1-3. Assume the following
options are currently available for British pounds (₤):
•Call option premium on British pounds
= $.04 per unit
•Put option premium on British pounds
= $.03 per unit
•Call option strike price = $1.56
•Put option strike price = $1.53
•One option contract represents
₤31,250.
At a long strangle position, what is your profit (loss) when
spot exchange rate changes to $1.40
-$0.04
+$0.14
+$0.10
+$0.06
-$0.06
What is the profit (loss) you earn from...
A currency speculator expects the spot rate of British Pounds (GBP) to change from $2.00 to...
A currency speculator expects the spot rate of British Pounds
(GBP) to change from $2.00 to $2.20 in 6-months. Assume the
speculator has access to credit lines of USD 20,000,000 in the US
and GBP 10,000,000 in UK. The annual borrowing and lending rates
are 6 percent in US and 4 percent in UK. If his forecast turns out
be to true, at the end of the 6-month period, the speculator’s
expected profit will be:
A currency speculator expects...
A currency speculator expects the spot rate of British Pounds(GBP) to change from $2.00 to $2.20...
A currency speculator expects the spot rate of British
Pounds(GBP) to change from $2.00 to $2.20 in 6 months. Assume the
speculator has access to credit lines of USD 20,000,000 in the US
and GBP 10,000,000 in UK. The annual borrowing and lending Rates
are 6 percent in the US and 4 percent in UK. In order for the
speculator to take advantage from the expected spot rate change in
GBP, it should?
The follow table list foreign exchange rates between US dollars and British pounds (GBP) during April...
The follow table list foreign exchange rates between US dollars
and British pounds (GBP) during April
Date
U.S. Dollars per GBP
4/1
1.9564
4/4
1.9293
4/5
1.914
4/6
1.9374
4/7
1.961
4/8
1.8925
4/11
1.8822
4/12
1.8558
4/13
1.796
4/14
1.7902
4/15
1.7785
4/18
1.7504
4/19
1.7255
4/20
1.6914
4/21
1.672
4/22
1.6684
4/25
1.6674
4/26
1.6857
4/27
1.6925
4/28
1.7201
4/29
1.7512
Which day would have been the best day to convert $200
into British pounds? Which day would...
Assume the one-year interest rate is 8% on GBP and 1% on EUR. At the same...
Assume the one-year interest rate is 8% on GBP and 1% on EUR.
At the same time, inflation is running at an annual rate of 3% in
Germany and 1.5% in UK. The current spot rate is EUR/GBP 1.17.
a) If the one-year forward premium of the euro against the pound
is 8%, is there an arbitrage opportunity? Explain.
b) If there is an arbitrage opportunity, will the British or the
German investor be able to make a profit? How...
Assume the spot price of the British pound is currently $1.8. If the risk-free interest rate...
Assume the spot price of the British pound is currently
$1.8.
If the risk-free interest rate on 1-year government bonds is
4.4% in the United States and 7.2% in the United Kingdom, what must
be the forward price of the pound for delivery one year from
now?
(Do not round intermediate calculations. Round your answer to 3
decimal places.)
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