Question: Suppose that the current eur/gbp spot rate is 0.6, the effective risk-free rates of return are r = 6 percent and r = 8 percent,

Suppose that the current eur/gbp spot rate is 0.6, the effective risk-free rates of return are r = 6 percent and r∗ = 8 percent, and the spot rate will either increase to 0.62 or decrease to 0.57 at time 1.
(a) What is the risk-adjusted probability of a spot rate increase? Decrease?
(b) What is the risk-adjusted expected value of the European call with a of 0.59?
(c) What is the time-0 value of the call?
(d) What is the factor u(d) by which the spot rate increases? Decreases?
(e) What is the option's exposure?
(f) Would the option's value change if it were American?

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