Derivatives Homework 4 f09

Derivatives Homework 4 f09 - dollar value by 60 percent or...

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Derivatives Homework 4 NAME_________________________________________ This is due at the start of class on 14 October 1. Find the dollar value today of a 1-period at-the-money call option on €10,000. The spot exchange rate is €1.00 = $1.50. In the next period, the euro can increase in dollar value by 60 percent or decrease by 37.50 percent. The interest rate in dollars is i $ = 3%; the interest rate in euro is i = 4%. Hint: risk neutral valuation is the fast way to get this done. ( 5 points) Your answer is worth zero points if it does not include currency symbols. Write your answer here in this box. (use 2 decimal places)
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2. The same call from the last question (1-period at-the-money call option on €10,000 with a strike price of $15,000) could also be thought of as a 1-period at-the-money put option on $15,000 with a strike price of €10,000. Recall that the spot exchange rate is €1.00 = $1.50. In the next period, the euro can increase in
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Unformatted text preview: dollar value by 60 percent or decrease by 37.50 percent. The interest rate in dollars is i $ = 3%; the interest rate in euro is i = 4%. a. Draw the binomial tree for this put option. Your answer is worth zero points if it does not include currency symbols ($, )! b. Find the risk-neutral probability of an up move. Hint: you cant recycle your risk neutral probability from the call option. c. Using your results from parts a) and b) find the value of this put option ( in ). Your answer is worth zero points if it does not include currency symbols ($, )! d. Verify that the dollar value of your put option equals the dollar value of your call. Your answer is worth zero points if it does not include currency symbols ($,)!...
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Derivatives Homework 4 f09 - dollar value by 60 percent or...

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