88. Find the value of a one-year call option on €10,000 with a strike price of $15,000. In one
year the exchange rate (currently
S
0
($/€) = $1.50/€) can increase by 60% or decrease by 37.5%
(
i.e. u
= 1.6 and
d
= 0.625). The current one-year interest rate in the U.S. is
i
$
= 4% and the
current one-year interest rate in the euro zone is
i
€
= 4%
A. €1,525.52
B. $3,328.40
C. $4,992.60
D. €2,218.94
E. None of the above

89. Consider a 1-year call option written on £10,000 with an exercise price of $2.00 = £1.00. The
current exchange rate is $2.00 = £1.00; The U.S. risk-free rate is 5% over the period and the U.K.
risk-free rate is also 5%. In the next year, the pound will either double in dollar terms or fall by
half (i.e.
u
= 2 and
d
= ½). If you write 1 call option, what is the value today (in dollars) of the
hedge portfolio?

90. Value a 1-year call option written on £10,000 with an exercise price of $2.00 = £1.00. The
spot exchange rate is $2.00 = £1.00; The U.S. risk-free rate is 5% and the U.K. risk-free rate is
also 5%. In the next year, the pound will either double in dollar terms or fall by half (i.e.
u
= 2
and
d
= ½). Hint:
H
=
.
⅔

7-27

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Chapter 07 Futures and Options on Foreign Exchange
91. Consider a 1-year call option written on £10,000 with an exercise price of $2.00 = £1.00. The
current exchange rate is $2.00 = £1.00; The U.S. risk-free rate is 5% over the period and the U.K.
risk-free rate is also 5%. In the next year, the pound will either double in dollar terms or fall by
half (i.e.
u
= 2 and
d
= ½). If you write 1 call option and hedge it using an appropriate position in
pounds what is your net cash flow (in dollars) at maturity if the exchange rate increases? Hint:
H
⅔

92. Consider a 1-year call option written on £10,000 with an exercise price of $2.00 = £1.00. The
spot exchange rate is $2.00 = £1.00; The U.S. risk-free rate is 5% and the U.K. risk-free rate is
also 5%. In the next year, the pound will either double in dollar terms or fall by half (i.e.
u
= 2
and
d
= ½). If you write 1 call option and hedge it using an appropriate position in pounds, what
is your net cash flow (in dollars) at maturity if the exchange rate increases? Hint:
H
=
.
⅔
A. £6,666.67
B.
C.
D. None of the above

93. Which of the following is correct?

Chapter 07 Futures and Options on Foreign Exchange