Question

You are given:

(i) The spot exchange rate is 1.7 $/ £

(ii) The continuously compounded risk-free rate in dollars in 6.3%

(iii) The continuously compounded risk-free rate in pounds sterling is 3.4%

(iv) a 6-month dollar-denominated European put option on pounds with a strike of 1.7 $ /£ costs $0.04

(Question 6)

For conditions in Problem 5, determine the premium in pounds of a 6-month denominated European put option on dollars with a strike of 1/1.7 £/$.

Answer 1