Question

A put option on British pounds has a strike (or exercise) price of $1.60/BP and the put premium per British pound is $0.03. If he spot FX rate at the expiration date is $1.55/BP, what would be the net profit of this put option holder. (calculate the net profit calculation & draw a net profit graph precisely) 3. 0.02 US one year interest rate is 6% annual and EU one year interest rate is 8% annual Currently the spot rate in the market is $1.12/Euro. According the International Fisher Effect, what is your prediction about the value of euro against US$ after one year. Calculate the future spot rate in a year and justify your answer based on the theory 4. $1.096/euro If the inflation rate in the U.K. is higher than the inflation in the U.S. by 2%, the relative PPP theory would predict that the British pound would (Long term) 5. against USS by -2%

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Answer 1

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3 A put option get exercised when the spot price on the expiry date is lesser than the strike price. Premium is the amount paid to buy the option. The proceeds from the option exercising would be Difference between strlice price and spol price on expiry date. So, value of put option - Max (o, Strike Price - spot apore date) in Value of Man (O, (1.6 - 1.55) put option value of $0.05/BP. (Inflow) The outflow of so, there for premium amount = $0.03/1BP the net profit = $0.05 -0.03. $0.02./BP

GRAPH OF NET PROFIT Profit Value of option toos.- "Net PROFIT +0.02t --- -0.0) - & share price at 0.J 1. los 1.6 troping

47 international FISHER Eject. a * Differences in nominal interest rates between countries can be used to predict changes in exchange rater. ... The countries with higher interest rates experience high inflation which causes the depreciation of that country's cusrency comparing to other countries. an given data, EU has higher interest sak. so, the prediction is "The value of euro against us & will decline after I year. formula: Y change in cusrency where Itif t = interest rate in foreign country interest rate in home country. So, I change in warncy. 6% - 87 1 + 8 0.06 0.08 + 0.08 -0.02 1.08 =-1.8519%

future spot sale - spot sale + change - 1.12+(-185192) = 1.12- (1.85198 of 1.12) - 1.0993 & future rate $1.0993 / Euro That means the rate has been declined as we can see the dollars that are esial to I tuso got decreased, which is the depreciation of Euro (as dollars per Euro declined from 1.12 to 1.0993) So, justified. 5 Ppp theory – the currency rate between 2 countries, depends on the purchasing powers (Inflation dates) of those countries The country's currency which has high inflation rate will decline depreciate. so, the british pound would depreciate decline 1. against us &. (As given data says uk has high inflation rate). And this theory tells the inflation rate differences would be equal to the differente between currency of 2 countries in terms of percentage.

And the theory says, the wouncy of high inflated counting dimishes cepto the extent of the percentage which is the difference between interest rates of the countries. so, the British Pound would Decline against Ws & by 2 %