10.[5] You can buy or sell the £ spot at $1.60 to the pound. You can buy or sell the pound 1 year forward at $1.62 to the pound. If U.S. annual interest rates are 4%, what must be the one year British interest rate if interest rate parity holds?.

11.[4] A stock has a spot price of $35. Its May options are about to expire. One of its puts is worth $5 and one of its calls is worth $5. The exercise price of the put must be ___A__ and the exercise price of the call must be ___B__. (please show work for A & B)

12.[2] Why do mortgage lenders prefer ARMs while many borrowers prefer fixed rate mortgages, ceteris paribus?

1.62 = 1.60 *(1+4%)/(1+r)
or
1 + r = 1.60 *(1+4%)/1.62
or
1+r = 1.664/1.62
or
1+r = 1.02716
or
r = 1.02716 - 1 = 0.02716 = ...

Solution Summary

The solution provide clear example to compute interest rate for domestic/ international currency with given scenario. In another example it will compute exercise price for both call & put option and thirdly it explains, why lender prefer ARM instead of FRM.

The common stock of File Co. is selling at $90. A 26-week call option written on file's stock is selling for $8. The call's exercise price is $100. The risk-free rate is 10% per year.
1. Suppose that puts on File Co stock are not traded, but you want to buy one. How would you do it?
2. Suppose that puts are traded. What s

Please help with the following problem.
On June 25, the call premium on a December 25 PHLX contract is 5.42 cents per
pound at a strike price of $1.81. The 180-day interestrate is 4.22% in London and 2.45% in New York. If the current spot rate is 1 pound sterling = $1.6720 and the put=call parity holds, what is the put pre

The current price of a stock is $33, and the annual risk-free rate is 6%. A call option with an exercise price of $32 and one-year until expiration has a current value of $6.56.
What is the value of a put option written on the stock with the same exercise price and expiration date as the call option?

1. A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.03 per unit. A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $.02 per unit. You plan to purchase options to cover your future receivables of 700

Please answer the following two problems:
1: InterestRate Parity
The current 90-day interestrate in the United States is 1 percent. The current 90-day interestrate in France is 2
percent. The current spot rate for the French franc (FF) is $0.18679/FF. If the interestrate parity (IRP) holds between the United States an

The theory of interestrate parity states that the annual percentage differential in the forward market for a currency quated in terms of another currency is equal to the approximate difference in _______ prevailing in the two countries
a. interestrates
b. trade deficit rates
c. GNP growth rates

A. Use the Black-scholes formula to find the price of a three-month European call option on a non-dividend-paying stock with a current price of $50. Assume the exercise price is $51, the continuously compounded riskless interestrate is 8% per year, and standard deviation is .4.
b. What is the composition of the initial repli

Consider the following financial data:
UK DM
Inflation (expected annual) 10% 4%
1 Year InterestRate 12% ??
Spot Exchange Rate (DM/pound) 3
Assuming the international par