Create a risk-neutral probability of dollar strengthening


Complete the below:

Q1. Boeing has a future payable £5 million in one year. They can use either forward contract for options to eliminate their risk exposure. According to the following information, which rate is the break-even point between option hedge and forward hedge? The U.S. interest rate: 6.00% per annum.

The U.K. interest rate: 6.50% per annum.
The spot exchange rate: S1.80/E.
The forward exchange rate: $1.75/£ (1-year maturity).
The option premium: $0.0018/E

A. $1.731/£

B. 1.3121£

C. 1.123/£

D. 1.232/£

Q2. Find the value of a call option written on E100 with a strike price of $1.00 - €1.00. In one period, there are two possibilities: the exchange rate will move up by 15 percent or down by 15 percent (i.e. $1.15 = E1.00 or $0.85 = E1.00). The U.S. risk-free rate is 5 percent over the period. The risk-neutral probability of dollar depreciation is 2/3 and the risk-neutral probability of the dollar strengthening is 1/3.

A. S9.5238

B. S0.0952

C. $0

D. S3.1746

Q3. Yesterday, you entered into a futures contract to buy €62,500 at $1.50 per E. Your initial performance bond is S1,500 and your maintenance level is $500. At what settle price will you get a demand for additional funds to be posted (margin call)?

A. S1.5160 pert

B. S1.208 per E.

C. $1.1920 per E.

D. S1.4840 per E.

Q4. If the one-year interest in Australian dollar is 4% and the interest rate in U.S. dollar is 2% What will be the one-year forward premium or discount for the SUSD/AUD exchange rate?

A. 1.92%

B. 2.78%

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Other Management: Create a risk-neutral probability of dollar strengthening
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