You are given: (i) The current euro/dollar exchange rate is 0.72. (ii) The price of a 1-year

Question:

You are given:

(i) The current euro/dollar exchange rate is 0.72.

(ii) The price of a 1-year euro-denominated European call option on dollars with a strike price of €0.70 is €0.09.

(iii) The price of a 1-year euro-denominated European put option on dollars with a strike price of €0.70 is €0.05.

(iv) The continuously compounded risk-free interest rate on euros is 2%.

(v) The continuously compounded risk-free interest rate on dollars is 1%.

Describe actions you could take to earn arbitrage profits at time 0, and calculate the arbitrage profits in euros.

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Derivative Pricing

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Authors: Ambrose Lo

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Question Posted: Dec 02, 2023 03:23 AM

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You are given: (i) The current euro/dollar exchange rate is 0.72. (ii) The price of a 1-year

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