Question

In: Finance

The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer...

The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer the choice of paying a £10,000 bill due in 90 days with either £10,000 or €12,500. Select one:

a. The seller has given the buyer an at-the-money call option on euro with a strike in pounds.

b. The seller has given the buyer an at-the-money put option on pounds with a strike in euro.

c. The seller has given the buyer an at-the-money put option on euro with a strike in pounds.

d. none of the options

Solutions

Expert Solution

In this case, the seller has given the buyer both the option of at the money call option and at the same time he has also provided with at the money put option.

The seller has given the buyer at the money put option on Euro with the strike price in pound

Correct answer is option (C) the seller has given the buyer an at the money put option on Euro with the strike price in pound


Related Solutions

Suppose that the current spot exchange rate is $1.25/€ and the 1-year forward exchange rate is...
Suppose that the current spot exchange rate is $1.25/€ and the 1-year forward exchange rate is $1.20/€. The 1-year interest rate is 2.00 percent per annum in the United States and 5.00 percent per annum in France. Assume that you can borrow up to $1,000,000 or €800,000. Calculate your arbitrage profit in €.
Suppose that the current spot exchange rate of the EUR is USD 1.25 / EUR and...
Suppose that the current spot exchange rate of the EUR is USD 1.25 / EUR and the 3-month forward exchange rate is USD $1.10 / EUR. The 3-month interest rate is 4% per annum in the US and 3% per annum in Germany. Assume that you can borrow EUR 1,000,000 or USD 1,000,000. Determine whether interest rate parity is currently holding. If IRP is no holding, how would you carry out covered interest arbitrage (CIA)? Show all the steps and...
A U.S. company sells merchandise today to a British firm for £210,000. The current exchange rate is $1.35/£, the ac
A U.S. company sells merchandise today to a British firm for £210,000. The current exchange rate is $1.35/£, the account is payable in six months, and the company chooses to disregard any hedging techniques designed to reduce the risk of changes in the exchange rate. If the exchange rate changes to $1.39/£, the U.S. company will realize a ofA) loss; €8,400B) gain; €8,400C) loss; $8,400D) gain; $8,400
Assuming £1.00 = $1.45 and €1.00 = $1.25, the interest rate in the UK is 6.50%...
Assuming £1.00 = $1.45 and €1.00 = $1.25, the interest rate in the UK is 6.50% and the interest rate in Germany is 5.45%, determine the forward rate of the   £ / € if interest rate parity (IRP) holds. What does this imply about future forward rates? Explain how you can engage in covered interest arbitrage if the spot rate remains the same, and the interest rate in the UK is still 6.50%, and the forward rate is .868 £...
5) Assuming £1.00 = $1.45 and €1.00 = $1.25, the interest rate in the UK is...
5) Assuming £1.00 = $1.45 and €1.00 = $1.25, the interest rate in the UK is 6.50% and the interest rate in Germany is 5.45%, determine the forward rate of the   £ / € if interest rate parity (IRP) holds. What does this imply about future forward rates? Explain how you can engage in covered interest arbitrage if the spot rate remains the same, and the interest rate in the UK is still 6.50%, and the forward rate is .868...
The euro exchange rate is $1.25/euro
The euro exchange rate is $1.25/euro. The continuously compounded dollar interest rate it 5% and the continuously compounded euro in- terest rate is 4%. Suppose that you borrow euros and lend dollars for 1 year. At what exchange rate will you break even on this position?
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free rate is 2% while the British Pound risk-free rate is 3% for all maturities. Both rates are annual and continuously compounded. a) Calculate the futures price of the British Pound in USD for delivery in six months. b) Given the same spot rate and the same British Pound risk-free rate, calculate the implied annual risk-free rate in USD if the price of the equity...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free rate is 2% while the British Pound risk-free rate is 3% for all maturities. Both rates are annual and continuously compounded. a) Calculate the futures price of the British Pound in USD for delivery in six months. b) Given the same spot rate and the same British Pound risk-free rate, calculate the implied annual risk-free rate in USD if the price of the equity...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free rate is 2% while the British Pound risk-free rate is 3% for all maturities. Both rates are annual and continuously compounded. a) Calculate the futures price of the British Pound in USD for delivery in six months. b) Given the same spot rate and the same British Pound risk-free rate, calculate the implied annual risk-free rate in USD if the price of the equity...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free rate is 2% while the British Pound risk-free rate is 3% for all maturities. Both rates are annual and continuously compounded. a) Calculate the futures price of the British Pound in USD for delivery in six months. b) Given the same spot rate and the same British Pound risk-free rate, calculate the implied annual risk-free rate in USD if the price of the equity...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT