Question

**Suppose the current spot exchange rate between the U.S.
dollar and British pound is $1.6/£. A European call option on
pounds is expiring today. The call option has an exercise price of
$1.56/£. At the same time, a European put option on pounds is
expiring today. The put option has an exercise price of $1.65/£. 2
points**

**Given the information above, which of the following is
correct?**

- both the call option and the put option are out-of-the-money.
- both the call option and the put option are in-the-money.
- the call option is in-the-money while the put option is out-of-the-money.
- the call option is out-of-the-money while the put option is in-the-money.

Answer #1

For a Call
Option |
|||||||

If the actual price of the underlying asset is more than the | |||||||

strike/exercise price, then the call option is said to be | |||||||

"in the money". | |||||||

In the given problem actual price i.e. current spot price $1.60 | |||||||

is more than the exercise price i.e
$1.56, so call
option is |
|||||||

"in the
money". |
|||||||

For a Put
Option |
|||||||

Put Option is said to be in-the-money if actual price of the | |||||||

underlying asset is less than the exercise price. | |||||||

In the given problem Current Spot price $1.60 is less than | |||||||

the exercise price of $1.65, so
Put Option
is in-the-money. |
|||||||

So, answer is Option
(b). |
|||||||

both the call option and the
put option are in-the-money |
|||||||

The current Dollar-Pound exchange rate is 1.60 dollars per
British Pound. The U.S. and British risk-free interest rates
(annualized, continuously compounded) are 5% and 7.5%,
respectively. Answer the following questions.
A. What is the no arbitrage forward price of the British Pound
for a 6-month forward contract?
B. Suppose the actual forward price is 1.65 dollars per British
Pound. Illustrate the arbitrage opportunity.

Suppose the exchange rate is $1.54/£, the British
pound-denominated continuously compounded interest rate is 2%, the
U.S. dollar-denominated continuously compounded interest rate is
5%, and the price of a 6-month $1.60-strike European call on the
British pound is $0.1614. What is the value of a 6-month
$1.60-strike European put on the British pound? Answers: a. $0.2024
b. $0.1972(Correct answer) c. $0.1797 d.
$0.2435 e. $0.2214. Please show all your work, thank you.

2. If the Canadian dollar to U.S. dollar exchange rate is
1.05CAD/$ and the British pound to U.S. dollar exchange rate is
0.9pounds/$, what must be the Canadian dollar to British pound
exchange rate?

1.Suppose that the spot price of the
Canadian dollar is U.S. $0.95 and that the Canadian dollar/U.S.
dollar exchange rate has a volatility of 8% per annum. The
risk-free rates of interest in Canada and the United States are 4%
and 5% per annum, respectively.(6 points)
N(0.0429)=
0.5171
N(-0.0264)
0.4895
N(-0.0429)=
0.4829
N(-0.0264)=
0.5105
N(0.1429)=
0.5568
N(0.0736)
0.5293
N(-0.1429)=
0.4432
N(-0.0736)=
0.4707
N(0.2429)=
0.5960
N(0.1736)
0.5689
N(-0.2429)=
0.4040
N(-0.1736)=
0.4311
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British
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1 USD
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The current dollar−pound exchange rate is $2 per British pound.
A U.S. basket that costs $100 would cost $140 in the United
Kingdom. For the next year, the U.S. Fed is predicted to keep U.S.
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1. (Scenario: Monetary Approach in the Long-run) What is the
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The current dollar-pound exchange rate is $1.50 to
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£1.00.
PLEASE SHOW ALL WORK AND BE THOROUGH

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