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# hw2 - Introduction to derivatives Fall 2011 BUSI 588...

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Introduction to derivatives, Fall 2011 BUSI 588, Homework 2 Homework 2 Due at the beginning of class, September 14th, 2011. 1. (*) Suppose that the current spot price for the euro is \$0.90, and that the interest rate in the euro zone stands at 15%. Further assume that the term structure in the US is flat at 5%, and that the volatility of the dollar/euro exchange rate stands at 35%. Venis Telroy Inc. is a new firm in the forward trading business. They are buying and selling one-year forward contracts on the euro. They are quoting a bid of \$0.86 and an ask of \$0.87. (a) What would you assess as a fair value for the one-year forward price on the euro? (b) If you could trade with Venis Telroy, can you suggest a trading strategy? 2. (*) Consider a binomial world in which a stock, over the next year, can go up in value by 20% (subjective probability of 55%) or down by 10% (subjective probability of 45%). The stock is currently trading at \$10. The riskfree return is 5%. Consider a call that expires in one year, with a strike price of \$11.

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hw2 - Introduction to derivatives Fall 2011 BUSI 588...

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