The table below provides the information about the future possible exchange rates and the value of your foreign assets. State Prob.P* S($/£)P(=SP*)
1 0)25 £950 1.5 $1,425
2 0)5 £1,000 1.6 $1,600
3 0)25 £1,100 1.7 $1,870
Based on this information,you can construct a perfect hedge by buying £2700 of call options and some put options with strike price 1.6$/£.How many put options you need to buy:

Question

Quizplus · Accepted Answer

To construct a perfect hedge, the total amount of foreign assets (£2700) needs to be fully covered by the combination of call and put options. Given that the call options already cover £2700, the put options need to cover the same amount to ensure a perfect hedge. Since the put options are specified with a strike price of 1.6 $/£, and the total amount to hedge is £2700, the number of put options required is calculated based on the total amount divided by the amount each put option covers. Each put option covers £1 at the strike price of 1.6 $/£, so to cover £2700, you would need 2700 put options. However, the correct answer here is based on the information provided and the specific details of the question, which seems to have an inconsistency in the explanation. The correct approach to determine the number of put options would typically involve ensuring the total value hedged in dollars is equivalent to the value that needs protection, but without additional details on the options' specifics (like their denomination or how they exactly cover the assets), the direct answer is 2700 put options to match the £2700 needing coverage. This answer assumes each put option covers £1 of the asset, but the question's phrasing might suggest looking for a different kind of calculation or might contain a typo in the options provided.

The Table Below Provides the Information About the Future Possible