Question

19 Suppose that the GBP is pegged to gold at £20 per ounce. The USD is pegged to gold at $35 per ounce. This implies an exchange rate of $175/18. How might an Investor take advantage of situation if the current market exchange rate is $1.60/1£? Multiple Choice points 02-50-30 0 Buy gold at $35 per ounce. Convert the gold to $200 at $20 per ounce. Exchange the €200 for dollars at the current rate of $160 per pound 0 Neither option since it is not possible earn an arbitrage profit. 0 Buy pounds at the current rate of $1.60/18. Buy gold at $20 per ounce Convert the gold to dollars at $35 per ounce 0 ) The Investor is indifferent between the two investment strategies since they yield the same arbitrage profit The current spot exchange rate is $1.55 - €1.00 and the three-month forward rate is $1.70 = €1.00. A three-month American call option on €62,500 has a strike price of $1.50 = €1.00. If you pay an option premium of $10,000 to buy this call, at what exchange rate will you break-even? Multiple Choice points 02:50-19 o $1.62 = €100 None of the options. a $158 - €1.00 O $150 €1.00 $166 - €100 Draw : 5

Answer 1

1.
Option C

2.
Option E

Breakeven price=Premium/Number of Euros+Strike price in $/EUR

1 EUR=10000/62500+1.50 $
=1.66000 $
$1.66=1 EUR