Question

What is the value in dollars of a derivative that pays off $£ 10,000$ in 1 year provided that the dollar/sterling exchange rate is greater than 1.5000 at that time? The current exchange rate is 1.4800 . The dollar and sterling interest rates are $4 \%$ and $8 \%$ per annum, respectively. The volatility of the exchange rate is $12 \%$ per annum.

   What is the value in dollars of a derivative that pays off $£ 10,000$ in 1 year provided that the dollar/sterling exchange rate is greater than 1.5000 at that time? The current exchange rate is 1.4800 . The dollar and sterling interest rates are $4 \%$ and $8 \%$ per annum, respectively. The volatility of the exchange rate is $12 \%$ per annum.

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Options, Futures, and Other Derivatives

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 26, Problem 26

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Step 1

To calculate the present value of the payoff in dollars, we need to convert the £10,000 into dollars using the current exchange rate. The current exchange rate is 1.4800, so the present value of the payoff in dollars is: Present value in dollars = £10,000 * Show more…

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What is the value in dollars of a derivative that pays off $£ 10,000$ in 1 year provided that the dollar/sterling exchange rate is greater than 1.5000 at that time? The current exchange rate is 1.4800 . The dollar and sterling interest rates are $4 \%$ and $8 \%$ per annum, respectively. The volatility of the exchange rate is $12 \%$ per annum.

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