1. The nominal annual interest rate on 6-month US treasury securities is 0.06% (i.e. the semi-annual return is 0.03%). The spot rate of the British pound is $1.6426 (0.6088 pounds per US Dollar) and the 6-month forward rate of the British pound is $1.6396 (0.6099 pounds per US Dollar). If interest rate parity holds, what is the nominal annual interest rate on the default-free 6-month British pound?

2. The common stocks of DEF Inc. currently sell for P38. There is a call option on this stock with an exercise (strike) price of P40. At the end of year 1, there is a 50% chance that the price will be P35, and another 50% chance that it will be P55. The risk-free rate of return is 5%. What is the value of the riskless hedge portfolio today?

Answer rating: 100% (QA)

Solution Solution 1 Caleulation of Nominal Annual Interest Rate British pound forward Rate t... View the full answer