In this problem you will price various options with payoffs based on the Eurostoxx index and the dollar euro exchange rate Assume thatQ 2750 (the index), x 1 25 ($ C), s 0 08 (the exchange rate volatility), 0 2 (index volatility), r 0 01(the U S risk free rate), rf 0 03 (the euro denominated risk f...

a This option can be priced using the BlackScholes formula from the perspective of the foreign curre ...

In this problem you will price various options with payoffs based on the Eurostoxx index and the

Question:

In this problem you will price various options with payoffs based on the Eurostoxx index and the dollar/euro Assume thatQ= 2750 (the index), x = 1.25 ($/=C), s = 0.08 (the volatility), σ = 0.2 (index volatility), r = 0.01(the U.S. risk-free rate), rf
= 0.03 (the euro-denominated risk-free rate), δQ
= 0.02 (the yield on the index), ρ = 0.25 (the index correlation), and
T = 1. Verify the following prices (all are in dollars):
a. Equity index call denominated in euros: max(QT
− K, 0), K = 2500 ($457.775)
b. Foreign equity call struck in domestic currency: max(xTQT
− Kd, 0), Kd=$3200 ($414.574)
c. Fixed foreign equity call: .x max(QT
− K, 0); .x = 1.25, K =
2500 ($456.988)
d. Equity-linked foreign exchange call: max(xTQT
− KQT , 0), K = $1.20 ($152.561) Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...