Suppose that the exchange rate is $0.92/Euro. The dollar-denominated interest rate is 4% and the euro-denominated interest rate is 3%. u = 1.2, d = 0.9, T = 0.75, n = 3, and K = $1.00. a. What is the price of a 9-month European put? b. What is the price of a 9-month American put?
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Suppose that the exchange rate is $0.92/Euro. The dollar-denominated
interest rate is 4% and the euro-denominated interest rate is 3%.
u = 1.2, d = 0.9, T = 0.75, n = 3, and K = $1.00.
a. What is the price of a 9-month European put?
b. What is the price of a 9-month American put?
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- Suppose that the exchange rate is 0.60 dollars per Swiss franc. If the franc appreciates 10% against the dollar, how many francs would a dollar buy tomorrow?Suppose a European call option to buy 1 euro for 1.40 CAD costs 0.08 CAD. The option maturity is in two months and the forward exchange rate for the same maturity is 1.50 CAD per euro. What arbitrage opportunity exists? Explain how you can exploit this opportunity and how much the profit is. (Ignore the time value of money)Suppose the risk free rate in pounds (£) is 2.67% and the risk free rate in US dollars ($) is 5.03%. The current £ to $ exchange rate is 1.43 (so £1 can be exchanged for $1.43 with the money exchanged right now). You and a broker want to agree an exchange rate now for a £ to $ conversion, but where the money will be exchanged in precisely 30 months time. What exchange rate (£ to $) should you and your broker use to ensure there is no arbitrage?
- Question Il: Suppose that the exchange rate is $0.92/e. Let rs = 4%, and re = 3%, u = 1.2, d = 0.9, T = 0.75, number of binomial periods = 3, and K = $1.00 Use Binomial Option pricing to answer the following two questions. (a) What is the price of a 9-month European put? (b) What is the price of a 9-month American put?Question Il: Suppose that the exchange rate is $0.92/e. Let rs= 4%, and re= 3%, u = 1.2, d = 0.9, T = 0.75, number of binomial periods = 3, and K = $1.00 Use Binomial Option pricing to answer the following two questions. (a) What is the price of a 9-month European call? (b) What is the price of a 9-month American call?Suppose the current USD/EUR spot exchange rate is 1.20$/ €. At the same the euro interest rate amount to 10% per year while the dollar interest rate is 0% per year. a. What is the no-arbitrage one-year USD/EUR forward exchange? b. Suppose the one-year USD/EUR forward exchange was 1.25$/ €. How could you make money from this situation? 4
- Suppose current one-year interest rate in Europe is 5%, whereas one-year interest rate in the U.S. is 3%. Assume the current spot price of euro (EUR) is $1.10. Answer questions a) and b) below. If the exchange rate movement is consistent with the international Fisher effect (IFE), what will the spot price of EUR in one year be? Consider a trader who does not believe the IFE holds. The trader has decided to borrow $110,000 to invest in EUR-denominated deposits for one year without hedging. Recall the current EUR spot rate is $1.10. If the EUR spot rate in one year turns out to be $1.09, what will be the percentage return on this trading strategy?Suppose that investors are risk-neutral and the linear UIP equation holds. You are given the following information: UK interest rate: i = 0.07 US interest rate: i* = 0.02 Expected future spot rate e^e = 8. What is the current spot rate, e? (State your answer as a number to 2 decimal places. Exchange rates are Pounds per Dollar, in natural logs)Suppose that the current spot exchange is: 1 BP (British pound) = $1.21. Use the following interest rates.The interest rate is 8% in the US market (home market).The interest rate is 3% in the UK market (foreign market). i) Find the forward exchange rate when the IRP holds. ii) Assume that the IRP holds (this means you use the IRP forward exchange rate found above). When you invest $10,000 in the UK market and at the same time, enter a currency forward contract to sell BP in a year under the assumption that the IRP holds, show that the return from your foreign investment is equal to the return that can be achieved from the US market (home market). iii) If the forward exchange rate is 1 euro = $1.23 (the IRP does not hold), from what market will you have more investment return (%)? Show your work.
- 2. Suppose today's exchange rate is $1.23/€. The three-month interest rates on dollars and euros are 6% and 3 % (both anual rates), respectively. The three-month forward rate is $1.25. A foreign exchange advisory service has predicted that the euro will appreciate to $1.27 within three months. Consider 1 million euros. a.. How would you use forward contracts to speculate in the above situation? b. How would you use money market instruments (borrowing and lending) to speculate? C. Which alternatives (forward contracts or money market instruments) would you prefer? Why? d. Can you make profits without risks? If so, explain and calculate how you do that.Question I: 4%, and re = 3%, u = 1.2, d 0.9, T = 0.75, Suppose that the exchange rate is $0.92/€. Let r's number of binomial periods = 3, and K = $0.85. Use Binomial Option pricing to answer the following two questions. (a) What is the price of a 9-month European call? (b) What is the price of a 9-month American call? Question II: Use the same inputs as in the previous (first) question, except that K = $1.00. 1 (a) What is the price of a 9-month European put? (b) What is the price of a 9-month American put?Suppose the dollar interest rate and the pound sterling interest rate are the same, 6 percent per year. What is the relation between the current equilibrium dollar/pound exchange rate and its expected future level? O A. Expected dollar/pound exchange rate is higher than the current one. O B. Expected dollar/pound exchange rate is lower than the current one. C. Expected dollar/pound exchange rate is equal to the current one. O D. One cannot tell given the information above. Suppose the expected future exchange rate, $1.44 per pound, and the US interest rate remain constant, while Britain's interest rate rises to 8 percent per year. What is the new equilibrium dollar/pound exchange rate? New equilibrium exchange rate is $ per pound. (Enter your response to the nearest penny.)