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Calculate the value of the call option today in usd

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Reference no: EM132654841

Use the following information to answer the following.

An American traveller need to purchase €10,000 in one period and wishes to use options to fully hedge their exposure.

The current market information at t=0 is as follows:

Spot rates: St=0($USD/€) = 1.6;

Interest rates: i$usd = 7.10%; i€ = 5.00% per period

Option (call or put): European; strike price = $1.60/€; contract size = €10,000; expiry at t=1.

In one period (t=1), the two possibilities are: St=1($/€) = 1.8 or St=1($/€) = 1.2.

Considering the use of a call option on €10,000

Calculate the risk neutral probability of an up move in the exchange rate. Give your answer as a decimal - do not use percentages or the % sign.

Calculate the value of the call option today in USD. Do not enter $ signs or commas.

Reference no: EM132654841

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