Consider an option to buy £10,000 for €12,500.In the next period,if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent.On the other hand,the euro could depreciate against the pound by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.

$
\begin{array}{lll}
&spot Rates&Risk-tree Rates\
S_{0}(\$ / €) & \$ 1.60=€ 1.00&i \$ 3.00 \% \
S_{0}\left(\$ / £)\right. & \$ 2.00=£ 1.00&i €4.00 \% \
S_{0}\left(€ /£)\right. & € 1.25=£ 1.00&i £4.00 \%
\end{array}
$ State the composition of the replicating portfolio; your answer should contain "trading orders" of what to buy and what to sell at time zero.

Question

Consider an option to buy £10,000 for €12,500.In the next period,if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent.On the other hand,the euro could depreciate against the pound by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
 
$
\begin{array}{lll}
&spot Rates&Risk-tree Rates\
S_{0}(\$ / €) & \$ 1.60=€ 1.00&i \$ 3.00 \% \
S_{0}\left(\$ /  £)\right. & \$ 2.00=£ 1.00&i €4.00 \%  \
S_{0}\left(€ /£)\right. & € 1.25=£ 1.00&i £4.00 \%
\end{array}
$ State the composition of the replicating portfolio; your answer should contain "trading orders" of what to buy and what to sell at time zero.

Quizplus · Accepted Answer

The Answer of Consider an option to buy £10,000 for €12,500.In the next period,if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent.On the other hand,the euro could depreciate against the pound by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
 
$
\begin{array}{lll}
&spot Rates&Risk-tree Rates\
S_{0}(\$ / €) & \$ 1.60=€ 1.00&i \$ 3.00 \% \
S_{0}\left(\$ /  £)\right. & \$ 2.00=£ 1.00&i €4.00 \%  \
S_{0}\left(€ /£)\right. & € 1.25=£ 1.00&i £4.00 \%
\end{array}
$ State the composition of the replicating portfolio; your answer should contain "trading orders" of what to buy and what to sell at time zero.

Consider an Option to Buy £10,000 for €12,500 State the Composition of the Replicating Portfolio; Your Answer Should