question archive Problem #6: You are given: (i) The spot exchange rate for dollars to pounds is 1
Problem #6: You are given: (i) The spot exchange rate for dollars to pounds is 1
Subject:FinancePrice:2.86 Bought15
Problem #6: You are given: (i) The spot exchange rate for dollars to pounds is 1.76 $/£. (ii) The continuously compounded risk-free rate for dollars is 9%. (iii) The continuously compounded risk-free rate for pounds is 5%. A 7-month European put option allows selling £1 at the rate of $1.44 I£. A 7-month dollar denominated call option with the same strike costs $1.19. Determine the premium of the 7-month dollar denominated put option. answer correct to 2 decimals Problem #6: Correct Answer: 0.85 Your Mark: 0/2
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P=C+Xe^(-rd*t)-Se^(-rf*t)=1.19+1.44*e^(-9%*7/12)-1.76*e^(-5%*7/12)=0.8469
where P is price of put option, C is price of call option, X is strike price, rd is domestic risk free rate (risk free rate for dollars), rf is foreign risk free rate (risk free rate for pounds) and t is time to expiry
