Martinakom

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Teaching Since: Jul 2017
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Category > Business & Finance Posted 15 Aug 2017 My Price 3.00

Hi, can you help me to handle the question below?

Hi, can you help me to handle the question below? Thank you!

 

The spot CAD/GBP exchange rate is 1.73 (i.e. 1.73 CAD = 1 GBP) and its volatility is 20%. We consider a 1-year strangle on the CAD/GBP rate with strike prices of 1.65 and 1.80. The risk-free rates are 4% and 3% in Canada and the UK respectively. Each option contract is on 125,000 GBP.

  1. (a) Use a 6-step binomial tree to price the strategy (note: Up and down movements need to match the volatility. Show all the tree parameters).
  2. (b) What are the break-even point(s), the maximum profit and maximum loss of this strategy?
  3. (c) Explain how an increase in the exchange rate would affect the strangle cost. Compute approximately this change for an increase from 1.73 to 1.74. 

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Martinakom
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Status NEW Posted 15 Aug 2017 04:08 PM My Price 3.00

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