Consider an option to buy £10,000 for €12,500. In the next period, if the pound appreciates against the dollar by 37.5% then the euro will appreciate against the dollar by 10%. On the other hand, the euro could depreciate against the pound by 20%.

Big hint: don't round, keep exchange rates out to at least 4 decimal places.

Spot Rates

1 Risk-Free Rates

So(S/E) $1.60 - €1.00

i$ = 3.00%

So(S/E) $2.00 - €1,00

I(euro) =4.00%

So(€/£) e125 $1.00

I(pound)=4.00%

If the call finishes out-of-the-money what is your portfolio cash flow?

Answer rating: 100% (QA)

To calculate the portfolio cash flow if the call finishes outofthemoney we need to consider the thre... View the full answer